An interest rate cut from the Bank of England is “almost certain” after figures showed the economy growing by less than expected.
The Bank has held interest rates at 4 per cent at each of its last two meetings, but economists now say they expect a cut on 18 December, which would pave the way for more mortgage cost reductions.
The Bank tends to lower interest rates when it thinks inflation is falling sustainably towards its 2 per cent target.
But although inflation sits well above this, at 3.8 per cent, the Bank has publicly said it thinks it has peaked.
Poor economic growth levels can also sway the case for more rate cuts, because they can help boost the economy by encouraging people to spend money.
After figures were released on Thursday showing the economy grew just 0.1 per cent in the third quarter of the year, Thomas Pugh, partner and chief economist at accountancy firm RSM UK, said: “If we didn’t think a rate cut in December was already nailed on, this morning’s data means it would almost certainly be now.”
The Government has made growing the economy a key promise, and was hoping growth would help meet its ambitious spending plans. But sluggish growth means Rachel Reeves is likely to deliver a tax-raising Budget later this month, which could dampen growth yet further – creating a so called “doom loop” of low growth and high taxation.
However, higher taxation could also bring inflation down more quickly.
Pugh said the Budget this month could also push inflation down further, especially if it raised taxes on income, giving further cause to cut rates.
“A big disinflationary front-loaded Budget, which is what the Chancellor has repeatedly hinted, and would be needed to satisfy financial markets, would weigh on household incomes and could further depress consumers,” he said.
Other economists also agreed a December interest rate cut was more likely after Thursday’s figures.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: “These disappointing figures pave the way for a December interest rate cut by fuelling fears over economic conditions sufficiently enough to push a majority of rate-setters to authorise another policy loosening.”
Raj Badiani, economics director at S&P Global Market Intelligence, added that the data “ramped up the probability of an interest rate cut” in December.
Mortgage rates could fall further
Although the economic growth figures are bad news generally, mortgage experts say that they could raise the likelihood of further rate cuts for households.
Rates on fixed mortgages have already reduced in recent weeks and tend to go down further on expectations that interest rate cuts from the Bank will come sooner and faster.
Rates of below 4 per cent are available for customers with the biggest deposits or equity in their home.
And swap rates – which govern mortgage rates – have started to dip further on the likelihood of a December rate cut increasing.
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Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Swap rates, which underpin the pricing of fixed rate mortgages, were down a few basis points this morning after the GDP figures were released. It’s looking increasingly likely that we will see a December base rate cut, particularly as the voting was so close at the last meeting.
“Mortgage pricing is likely to inch down further as lenders compete for the subdued activity in the housing market, with an eye on year-end targets.
“Borrowers have been benefiting from lower mortgage rates over the past couple of weeks, a trend which looks set to continue.”
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