Experts said those hoping for a ‘quick cut’ to rates would be let down by Wednesday’s statement
Mortgage rates are set to stay higher for longer due to stubbornly high inflation, experts have warned, causing a significant challenge for Rachel Reeves over the cost of living.
The Office for Budget Responsibility (OBR) previously forecast that inflation would average 2.6 per cent this year but the Chancellor confirmed in her Spring Statement that it is now set to average 3.2 per cent.
This has led to warnings that interest rates will now fall more slowly, causing more financial pain for thousands of squeezed households trying to buy and re-mortgage property.
The gloomy picture will create a further headache for Reeves and Prime Minister Keir Starmer, amid concerning growth forecasts that experts warn may mean more tax rises.
Justin Moy, managing director at EHF Mortgages, told The i Paper: “Those looking for a quick cut to mortgage rates will be disappointed by Wednesday’s statement. With no additional support for homeowners, the mantra ‘higher for longer’ will rattle mortgage borrowers for the next few years.
“Confidence and stability still need to be proven by the Government, the economy has a number of tax rises to swallow and if growth goes into reverse, that would be the trigger for deeper cuts to rates. But in the meantime, there isn’t a lot of cheer for mortgage holders.”
Inflation fell to 2.8 per cent in the year to February, according to figures released on Wednesday, but is expected to rise later in 2024, and is still well above the Bank of England’s 2 per cent target.
The new OBR forecast blamed higher energy and food prices and “more persistently high wage growth” for a rebound in inflation to a fresh peak of 3.7 per cent in mid-2025, before it returns to its 2 per cent target in 2027.
How does inflation affect mortgage rates?
Inflation itself doesn’t directly determine mortgage rates but when inflation rises, the Bank of England is less likely to cut interest rates as quickly, and this stops generally stops mortgage lenders from cutting their prices.
Interest rates are currently at 4.5 per cent after being cut in February and held in March.
The average mortgage rate households are on is expected to rise from 3.7 per cent in 2024 to 4.7 per cent in 2028 – as those who locked in pre-pandemic cheap deals slide off their old rates.
New rates have fallen a little in the past three months and are now below 4 per cent for those with large deposits or equity, but Emma Fildes, property adviser at Brick Weaver, said any hopes for sub-3 per cent rates were “bulldozed” on Wednesday.
She said: “The Spring Statement comes with mixed blessings. Yes, stock levels are due to increase, which could stabilise house prices from significant growth but if inflation remains higher for longer, so mortgage rates will normalise at a higher rate.
“This will curtail, many first-time buyers dream of homeownership or force them down a route of shared ownership or small deposit schemes which leave buyers at risk should any further economic shocks hit.”
According to Rightmove, the average rates for two-year fixed-rate mortgages are 4.87 per cent, and 4.74 per cent for five-year fixes.
The lowest two-year fix on the market as of Wednesday is with Lloyds Bank at 3.86 per cent with a £999 fee. Barclays offers the lowest five-year fix at 3.96 per cent.
When are interest rates likely to fall?
At present, markets are pricing in two further interest rate cuts between now and the end of the year. This could see the bank rate fall to 4 per cent by the end of 2025.
Stephen Barber, professor of global affairs at the University of East London expects rates to be cut by the Bank in May.
He said: “The base rate has steadily come down since its peak in August 2023 and mortgage rates have sluggishly followed.
“The Bank’s Monetary Policy Committee (MPC) decided to hold rates at their last meeting and so we will learn a lot when their next decision is announced on 8 May.
“I would expect rates to be cut in May but if they are held once again, expect that sentiment to ripple through mortgage offers.”
Michael Saunders of Oxford Economics expects the MPC to continue cutting gradually.
He said: “I think the previous inflation forecast was too low. Markets already moved to allow for stickier inflation, which is why the yield curve has moved up since October.
“I don’t think the OBR’s latest forecast will affect the interest rate outlook either way, and I expect the MPC will continue to cut gradually – with the Bank rate down to 3.75 per cent at the year end.”
Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “The OBR forecasts today catch-up with the signs of persistent inflation emerging over the past few months, and accordingly factor in faster price rises in 2025 than previously thought.
“We expect rising inflation to restrict the MPC to just two more interest rate cuts this year, which means mortgage rates will fall only slightly through this year.”