The Bank of England has once again maintained the Bank Rate at 5.25%, despite inflation hitting its 2% target for the first time in three years.
Key Takeaways:
- The Bank of England’s Base Rate remains unchanged at 5.25%, marking the seventh consecutive hold.
- With inflation hitting the 2% target in May, many had anticipated a rate cut to alleviate borrowing costs.
- This news may disappoint mortgage holders eagerly awaiting relief since the Bank Rate peaked in August 2023, reaching its highest level in 16 years.
Bank Rate Holds Steady at 5.25%
The Bank of England has opted to keep the Bank Rate at 5.25% for the seventh consecutive review period. This decision is aimed at stabilizing inflation, which has led to increased mortgage repayments but also higher savings rates.
The Bank Rate, also known as the ‘base rate’ or ‘interest rates’, directly influences the rates lenders charge borrowers.
Inflation Reaches 2% Target After Three Years
Inflation moderated to 2% over the 12 months leading up to May, meeting the Bank of England’s inflation target for the first time in nearly three years, as reported by the Office for National Statistics on June 19.
Amidst controlled price rises, market attention turned to potential interest rate cuts, frozen at a 16-year high of 5.25% since August 2023. Uncertainty regarding these cuts has recently caused an uptick in mortgage rates, with average rates on two- and five-year fixed-rate deals creeping up since February, according to Moneyfacts.
Currently, the average two-year fixed rate stands at 5.93%, while the five-year fixed rate averages 5.50%.
Impact on Borrowers and Mortgage Options
John Fraser-Tucker, Head of Mortgages at Mojo Mortgages, commented on the cautious stance of the Bank of England during a General Election period, where any rate adjustment close to the voting period could be perceived as influencing voters. The chosen government’s housing policies are likely to shape future base rate movements.
The increase in mortgage choices to 6,629 products, the highest since February 2008, offers a silver lining for borrowers. However, the decreasing lifespan of available products, from 28 days in May to 15 days in June, underscores the urgency for borrowers to secure optimal deals promptly.
Impact on Existing Borrowers
For variable or tracker mortgage holders, the sustained rate provides relief from potential rate hikes, although the lack of a rate cut is disappointing.
The average standard variable rate (SVR) is currently 8.18%, a marginal decline from 8.19% in November, holding steady since April.
Fixed-rate mortgage holders are shielded for now, but those nearing the end of their terms may face increased repayments upon remortgaging, further tightening household budgets.
Forecasts for Future Interest Rates
Speculation surrounds potential rate cuts later this year, with predictions ranging from August to September, contingent upon economic developments.
A reduction in interest rates typically correlates with lower mortgage rates, although the exact impact remains uncertain.
Richard Donnell, our Executive Director of Research, believes that despite potential easing in inflation and interest rates, substantial declines in mortgage rates this year are improbable.
Donnell stated, “While lower interest rates might marginally reduce mortgage rates, their extent depends on the market’s perception of base rate movements. Economists anticipate base rates to settle around 3.5% by late 2025, suggesting mortgage rates may hover around the 4%+ range.”
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