Latest inflation studying means rates of interest will not be reduce subsequent month

Bank of England base rate rate cuts next month now look increasingly unlikely after inflation came in above what was forecast.

The Consumer Price Index measure of inflation came in at 2.3 per cent in April, higher than market predictions of 2.1 per cent.

While inflation has now dropped to its lowest level since summer 2021, it remains above the Bank of England’s target of 2 per cent.

This has led many to speculate the Bank of England will now keep the base rate at 5.25 per cent for the seventh time in a row when it reconvenes on 20 June.

The market now suggests a 16 per cent chance of a June rate hike compared to 60 per cent last week, according to Reuters.

The higher base rate has led to higher mortgage costs for many – especially those who have needed to remortgage.

As many as 1.6 million mortgage borrowers are rolling off their fixed rate mortgages over the course of this year, many of whom will currently be on a rate of 2 per cent or less. 

Today’s inflation reading means that people looking to buy or remortgage will likely have to wait a little longer for any meaningful shift in interest rates.

The average two-year fixed mortgage rate is now 5.93 per cent, according to Moneyfacts, and the average five-year fix is 5.5 per cent. 

The cheapest five-year fixes are all above 4.3 per cent while the lowest two-year fixes are all above 4.65 per cent.

David Hollingworth, associate director at L&C Mortgages said: ‘It’s good news to see the headline rate of inflation drop back so much closer to the Bank of England target rate, but it may also bring some disappointment for those looking for signs of an imminent cut to base rate.

‘The figures are at the higher end of forecasts and could see expectations for base rate to hold at a higher level for longer yet.

‘Mortgage rates have eased back a touch in recent weeks, but today’s figures may well hold back the chance for that to become a stronger trend.’

Mark Harris, chief executive of mortgage broker SPF Private Clients adds: ‘It’s a shame when what is essentially positive news is seen as disappointing.

‘There is a sense that some buyers and sellers are waiting for that first rate reduction before taking action.’

So will mortgage rates rise?

Ultimately, fixed rate mortgage pricing hinges less on what happens with base rate next month and much more on where markets are forecasting it will over the long run.

In terms of mortgage pricing, market interest rate expectations are reflected in swap rates. 

These swap rates are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.

Sonia swaps are used by lenders to price mortgages. As of 21 May, two-year swaps were at 4.49 per cent and five-year swaps were at 3.96 per cent.

Unless these swap rates fall we are unlikely to see any meaningful changes to mortgage rates.  

First, because from a historical perspective, it is very rare for the lowest priced fixed mortgage rates to go below swap rates, albeit it did happen in January for a very short period of time.

And second, prior to the quickfire base rate rises between December 2021 and August 2023, the lowest mortgage rates have trended above base rate. That was the case at least between 2008 and 2022.

This suggests that even if the base rate eventually settles at between 3 per and 4 per cent, we should expect mortgage rates to be higher than base rate when things settle down once again.

The view among mortgage brokers is that rates are unlikely to change much – at least for now.

‘A big fall in inflation was already expected and therefore already priced into fixed rates,’ says Hollingworth.

‘Mortgage borrowers may have to wait a little longer for base rate to fall and the recent ups and downs in mortgage rates should underline the ongoing uncertainty. 

‘Holding off in the hope of rates dropping could make for a bumpy ride for homeowners.’

Mark Harris adds: ‘Some momentum has emerged over the past couple of weeks with a number of big lenders reducing their fixed-rate mortgages on the back of the decline in Swap rates.

‘Five-year swap rates rose this morning to 4.11 per cent from 4.01 per cent yesterday largely because the markets have pushed back expectations of a rate cut so we will see whether this trend continues in the short term and what impact that has on mortgage rates.’