Homeowners looking to renew mortgages could be in for a boost, with lenders expected to bring down rates after inflation surprised economists with a hold at 2.8 per cent.
One of the ways the Bank of England (BoE) tries to combat rising inflation is to maintain interest rates at a higher level – higher rates means fewer people and businesses borrowing money, which can lead to less demand and investment activity, keeping prices lower.
So when inflation does not run as high as was expected, there will be more anticipation that the BoE’s Monetary Policy Committee (MPC) may keep the base rate the same or indeed lower it.
While the BoE’s interest rate does not directly determine mortgage product prices, swap rates – which lenders price them from – are affected by future expectations of the base rate.
With hopes up that the base rate will not move higher, the direction of travel for swap rates should continue on a downwards trends, bringing mortgage costs down.
Samuel Fuller, director of Financial Markets Online, said it could lead to a “price war” between banks and building societies hoping to attract customers, particularly with many having tried to hold off renewing over the past few months while costs shot up.
“This was a huge upside surprise. Many market watchers were convinced that April’s relatively modest inflation number was a fluke. But May’s numbers suggest that the inflationary tidal wave we had been expecting has just melted away,” he said.
“While services inflation came in hotter than forecast, most other numbers in the May report are a cooling balm for markets braced for soaring prices, and with them the chance of interest rate rises.
“All this means the BoE has no reason to increase interest rates any time soon. It’s instead likely to watch and wait, and if inflation stabilises further it may hold off on making any rate rises at all this year.
“This is a huge turnaround, as just a few weeks ago the swaps market was forecasting two base rate rises by the end of 2026.
“Cue huge relief for the 1.8m homeowners who are due to remortgage over the next year. The UK’s rapidly changing interest rate outlook could trigger a price war between mortgage lenders, many of whom will want to cut rates to make themselves more competitive.”
Darani Ganesharajah, mortgage broker at Springtide Capital, noted that some lenders had reduced rates already and pointed out tracker mortgages had been popular with people, thanks to lower pricing.
“Great news on inflation. Several lenders have cut rates this week, with Santander announcing further reductions to come in effect from tomorrow, including on tracker products,” she said. “Even if a Bank of England rate cut isn't around the corner, lower tracker margins are helping deliver more competitive options for borrowers.”
But it might not just be swap rates which come down if recent economic data continues in the same vein.
Tomasz Wieladek, chief European macroeconomist at T Rowe Price, believes the BoE may now also make its next move a downward one.
“Monetary policy in the UK appears to be finally working. A prolonged period of restrictive policy has, to a degree, weakened inflation. Given the good news on inflation and the recent decline in oil prices, the MPC will likely conclude that no more hikes are necessary to stabilise inflation in the UK,” he said.
“The market is still pricing one and a half hikes. But given Wednesday’s inflation data and the likely reopening of the Strait of Hormuz, this is unlikely now. The MPC will keep rates on hold instead. Indeed, given the shock to the real economy, the next move is likely to be a cut.”
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