Lenders will push mortgage prices even higher this week amid warnings that inflation could reach 5 per cent and force the Bank of England to increase its base rate.
Mortgage rates have been rising since the start of March, after the escalation of conflict in the Middle East, and more banks have hikes planned for Friday.
Experts say that some lenders will move on to their third or fourth round of hikes next week, “with no indication” of an end in sight.
It will come as a blow to both the government and home owners, who were expecting inflation to fall and were looking forward to cuts in interest rates – making mortgages cheaper – rather than hikes.
Prime Minister Keir Starmer had put the cost of living and growing the economy at the heart of his offer to the public, and at the beginning of this year there had been hopeful signs that the economy was finally improving, with inflation down and a series of rates cuts last year.
The Bank of England held interest rates at 3.75 per cent on Thursday – a few weeks ago the signs were it would cut rates – but economists on its Monetary Policy Committee (MPC) gave an indication that they would be willing to increase rates.
Until earlier this month, most economists had expected the base rate to be cut to at least as low as 3.5 per cent later this year – now most expect no cuts whatsoever, with one forecaster warning that inflation could even rise to 5 per cent in the worst case scenario.
Each quarter per cent rise in interest rates adds £15 to £20 to £100,000 of mortgage debt. Many homeowners will be protected by have locked-in fixed deals, but for those on trackers or coming to the end of a fixed deal the news will be a blow.
At one point on Thursday, traders were pricing in three hikes to the base rate this year, although Bank of England governor Andrew Bailey suggested markets were “getting ahead” of themselves.
Swap rates, which determine fixed mortgage rates, rose in response to predictions of base rate hikes, prompting lenders to announce more rises to their prices
Halifax, Britain’s biggest mortgage lender, has already revealed it will hike rates by up to 0.15 percentage points on Friday (20 March).
Mortgage brokers warned to expect further cuts to come.
Nicholas Mendes, mortgage technical manager at John Charcol, said: “Fixed rates are priced off future expectations, not just the current Bank Rate, so lenders do not need to wait for actual hikes before repricing.
“That is why we are seeing fixed-rate pricing move up so aggressively, and I would expect more short-notice withdrawals and possibly even some lenders temporarily stepping back while markets remain this volatile.”
David Hollingworth, associate director at L&C Mortgages, said: “My expectation is we’ll still see rates rise in the short term as lenders are trying to get to grips with where things will level off.
“Most lenders are going in to their third round of hikes or even their fourth, and there’s no indication that that will stop soon.”
Hollingworth said his own analysis showed that the average of the best 10 two-year mortgage rates available had already risen from 3.77 per cent to 4.35 per cent across March, which equated to a £780 per annum increase in bills for someone with a £200,000 mortgage on a 25-year repayment term.
Lewis Shaw, who runs brokerage Shaw Financial Services, added: “It’s likely that within the next seven to ten days, we’ll see another round of mortgage rate hikes, just as many were hoping to see their mortgage costs reduced.
“The UK is in a uniquely bad position economically, and this war and the ensuing issues it creates have come at the worst possible time and will impact swathes of the public in the worst possible way.”
The Bank of England has been cutting interest rates as inflation looked set to return and stay at its 2 per cent target. Earlier this year, it even forecast that it could reach this level this Spring.
But in Thursday’s meeting minutes, it warned inflation was expected to be around 3 per cent in the period from April to June rather than 2.1 per cent, as it had predicted in the February report.
Some forecasters said it could get higher later in the year. Accountancy firm RSM UK said if energy prices stayed at current levels, inflation could hit 4 per cent by the end of 2026.
But it added that this underestimated the impact of so-called second round effects – the indirect, knock-on consequences of an initial economic shock, like higher wage demands – which it said “could realistically push inflation towards 5 per cent.”
It said it was forecasting no interest rate changes this year, but its economist Thomas Pugh explained: “Clearly there is a risk that if energy prices go higher, and evidence of second-round effects start to emerge, then the Bank will have to hike rates.”
In the notes published alongside the decision to keep rates on hold, which the MPC made unanimously, multiple economists indicated they would be willing to increase rates.
Catherine Mann, one of the MPC’s nine members said: “I see the balance between inflation and activity to have shifted away from considering a cut towards considering a longer hold, or even a hike at some point to lean against inflation persistence.”
Willem Buiter, a former member of the Bank of England MPC, told The i Paper: “A couple of rate hikes are plausible.”
This would take interest rates to 4.25 per cent, the highest level since last summer.
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