Bank of England governor expects FOUR rate of interest cuts subsequent 12 months: What would it not imply for mortgage and financial savings charges?

The governor of the Bank of England says there are likely to be four interest rate cuts next year as inflation fades.

The ONS revealed inflation rose to 2.3 per cent in the 12 months to September, above what markets were forecasting. 

But speaking to the Global Boardroom conference with the Financial Times, Andrew Bailey said that despite the recent rise, he is confident inflation will soon return to its 2 per cent target.

Bailey then confirmed the Bank of England’s central forecast sees four quarter point interest rate cuts next year.

If correct, that would see base rate fall from 4.75 per cent, where it is now, to 3.75 per cent by the end of 2025, with the Bank having already cut rates from a high of 5.25 per cent since August this year.

If interest rates do fall to 3.75 per cent that would mark a slight shift from general market consensus, which currently sees interest rates going to 4 per cent by the end of next year.

What could it mean for mortgage borrowers? 

Those on tracker mortgages, which follow the base rate will benefit with each and every cut while those on other variable deals should with any luck see their lenders cut rates, albeit as and when the lender sees fit.

Those approaching the end of their fixed mortgage deals over the course next year and the year after will hope that mortgage rates will be lower when they come to refinance if the Bank of England projections play out.

Fixed mortgage rate pricing does not react to interest rates. Instead, they preempt interest rate changes.

This means that future interest rate cuts by the Bank of England are already somewhat baked into fixed rate mortgage pricing.

This is why the lowest priced five-year fixed rate products are hovering just above 4 per cent, rather than above the Bank of England base rate at 4.75 per cent.

However, if the market thinks interest rates will fall to 3.75 per cent by the end of next year, rather than 4 per cent there could be room for some mortgage rate cuts.

The lowest fixed rates are now all above 4 per cent but brokers suggest borrowers may be able to secure rates below 4 per cent once again if interest rates do indeed fall to 3.75 per cent.

Chris Sykes, technical manager at mortgage broker Private Finance said: ‘This is excellent news as this is likely better than a lot of the market expectations and coming from the Bank of England governor is a quite reputable source so this is more than likely to be beneficial and improve things like swaps, which will then filter through into mortgage rates.

‘A 3.75 per cent base rate would give the potential opportunity to see sub 4 per cent rates come back to the market if it is indeed accurate.’

Ravesh Patel, director and senior mortgage consultant at Reside Mortgages agrees that four base rate cuts next year should be good news for borrowers. 

‘If realised, it would signal a significant shift in the mortgage landscape,’ said Patel. ‘A lower base rate would likely encourage lenders to reduce rates on fixed-term residential mortgages, with some of the most competitive deals possibly falling within the 3-4 per cent range by this time next year. 

‘However, much depends on economic conditions, including lender competition, swap rates, and inflation trends.

None will be more pleased by further rate cuts, than buy-to-let landlords with mortgages – of which there are roughly 2million, according to UK Finance data.

Buy-to-let landlords tend to have interest-only mortgages to ensure positive cash flows. This was all well and good when they purchased investments when mortgage rates were around 2 per cent. 

But now the average five-year fixed rate buy-to-let mortgage is around 5.5 per cent, according to Moneyfacts.

On a £200,000 interest only mortgage, moving from a  rate of 2 per cent to 5.5 per cent means paying £917 a month instead of £334 a month.

‘For buy-to-let investors, rate cuts could provide some relief after years of rising borrowing costs,’ added Patel.

‘Lower rates might improve affordability and make refinancing more viable, especially for those who would fail affordability based on stress tests. 

‘However, the buy-to-let sector faces unique pressures, including increased regulatory costs, stricter stress testing, and changing tax rules. 

‘These factors could temper any widespread reduction in borrowing costs for landlords.’

Bad news for savers

While mortgage borrowers will be celebrating each and every interest rate cut by the Bank of England, savers, particularly those without a mortgage, will be feeling the exact opposite.

Rachel Springall, finance expert at Moneyfacts said: ‘Further base rate cuts will be devastating news for hard-pressed savers as they are the ones who feel the force of cuts to interest rates. 

‘Those savers who use their interest to supplement their income will feel overlooked if rates plummet further next year. 

‘We have already seen some of the biggest high street banks cutting savings rates in the aftermath of the base rate cuts this year, so savers really do need to check their accounts and switch if they are getting a raw deal. 

‘Base rate cuts could create an almost apathetic attitude among savers today, even as the average easy access account pays just shy of 3 per cent, bank base rate is much higher. 

‘Challenger banks are offering attractive returns and it would be unwise to overlook them when they have the same protections in place as a high street bank.’