Government borrowing costs have surged further, heaping more pressure on Labour over its tax and spending plans.
Yields on government bonds – which reflect the cost of government borrowing -have risen to 4.89 per cent for 10-year gilts, the highest level since 2008.
The rise in the cost of servicing government debts could cut into the Government’s financial headroom – which might mean it has to increase tax or decrease spending to ensure it meets a set of boundaries known as its fiscal rules.
However, many will be wondering what the increase means for them, in terms of its impact on interest rates and mortgages?
The i Paper spoke to experts to find out.
Economists gave a range of predictions last year for how many cuts to the base rate there would be in 2025, many of which remain the same, despite the new borrowing figures.
But some experts say the borrowing figures are one indication that there may be fewer interest rate cuts this year than previously expected.
Experts’ views varied between two, three or even four cuts this year, when The i Paper polled them last year.
The current base rate is 4.75 per cent with the Bank of England’s Monetary Policy Committee (MPC) set to decide whether to hold, cut or even increase rates on 6 February.
Jason Hollands, managing director of Evelyn Partners, said much of the MPC’s decision would be based on inflation and growth.
The next inflation figures, for December 2024, will be revealed next week. November’s figures showed it was at 2.6 per cent.
Hollands said: “Part of what the bond market is telling us, is that it is reigning back expectations on the pace of rate cuts this year because inflation – while having significantly decelerated – is likely to stay just above the Bank’s 2 per cent target rate for a while yet and recent inflation-busting public-sector wage settlements haven’t helped, either.
“The decision could be finely balanced though, especially if the growth outlook deteriorates further.”
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, added: “The Bank faces a very tricky situation, as the latest economic data points to more inflation pressure but weaker activity momentum. Despite potential economic headwinds in 2025, it will find it very difficult to deliver the rate cuts needed to stimulate the economy.
“If the Bank was to boldly cut rates, it will have to deliver a very strong and compelling narrative to the markets. Otherwise, it could risk more damage to investors’ confidence in the Bank’s inflation credibility and on UK assets.”
Yael Selfin, chief economist at KPMG, said: “We are still expecting three cuts this year, of 25 basis points each, with inflation fluctuating between 2 to 3 per cent and gradually returning to target.”
Capital Economics added it is also sticking to its previous prediction of the base rate falling from 4.75 per cent now to 3.75 per cent by December.
In a note it said: “If we’re right that inflation will fall below two per cent in 2026, we think most MPC members will still want to lower interest rates this year. After all, they may want to lower the base rate to offset the recent tightening in monetary conditions and the possible future tightening in fiscal policy.
“A 25 basis points cut once a quarter may strike a balance between supporting activity and not reigniting inflation.”
Others believe there will be less movement. Lindsay James, investment strategist at Quilter Investors, said: “The market had expected two rate cuts in the year ahead, this is now being reviewed, although two cuts still looks like the most likely scenario.”
What the high borrowing costs could mean for mortgage rates
If you have a fixed rate mortgage already, then the rate you pay on that mortgage will not change until the term of that mortgage is over.
If you are on a variable product, a tracker, or are getting a new fixed mortgage, then your costs could be influenced by borrowing rates, according to experts.
For those on a variable mortgage or a tracker, your rate will generally follow the Bank of England interest rate. If this stays higher for longer, the cost of your mortgage will also stay high for longer.
The price of new fixed mortgages could also be impacted, experts say.
Alper Kara, professor of banking and finance at Brunel University of London, told The i Paper that higher borrowing costs were “highly likely” to influence mortgage rates.
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Read More“Gilt yields are often used as benchmarks for various interest rates in the economy, including those on mortgages. Lenders may adjust mortgage rates upwards to align with now higher benchmarks rates in the broader economy, ensuring they cover their own borrowing costs,” he said.
He added: “Rising government borrowing costs will create uncertainty in financial markets, leading to higher risk premiums for the UK economy.
“Lenders might increase rates on credit products, including mortgages, for this perceived higher risk. What’s more, it is inevitable that increasing gilt yields, if it persists, will feed into the swap rates.
“And, when swap rates increase, the cost of offering fixed-rate mortgages rises for banks and other lenders. To maintain profitability, they pass on these increased costs to borrowers, leading to higher fixed mortgage rates. So there is a good chance that the higher borrowing rates keep interest rates high for longer.”
Mortgage lenders have started to cut rates in the past few weeks but lenders have warned that an increase in swap rates – which are based on expectations for where the base rate will go in the future – could feed through to higher prices soon.
The average two-year fixed rate is currently 5.47 per cent, while the average five-year is 5.25 per cent, according to Moneyfacts.
Stuart Cheetham, CEO of MPowered Mortgages, which is cutting mortgage rates late on Thursday, said rates could rise again in the near future.
He said: “For those borrowers looking to take advantage of current stamp duty tax relief at the higher thresholds before they are withdrawn at the end of March, now could be an attractive time to secure a mortgage offer.
“That said, we have seen swap rates increase in the past 24 hours which could mean that lenders begin to increase mortgage rates towards the end of the month so the window to secure current deals could be tight.”
Thomas Pugh, an economist at RSM UK, added: “Gilt yields have been rising along the curve over the last month as have swap rates. I’m not sure it makes sense to say one is driving the other here, both are being driven by the same fundamental factors of worries about stickier inflation, risks to the inflation outlook and a big issuance of debt globally over the next few years.
“The end result is the same though, mortgage rates will have to adjust higher to take into account the increases in the risk free rate.”
The i Paper spoke to experts to see whether now is a good time to buy or sell property.
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