Interest rates are likely to continue to fall this year, the head of the Bank of England has said boosting confidence that mortgage deals will continue to fall.
Andrew Bailey, the Governor of the Bank, said when speaking to CNBC on Tuesday: “I think that the path of interest rates will continue to be gradually downwards. I haven’t changed my mind on that.”
While Mr Bailey stopped short of confirming a cut in August, his remarks have been interpreted by economists as a strong indication that a reduction is likely.
He added that bringing inflation down to the Bank’s two per cent target is a key aim. It currently stands at 3.4 per cent.
“Well, there will be no sustained growth unless we have stable, low inflation. That’s a sort of almost written on the heart of all central banks.”
News of further interest rate cuts will hopefully pave the way for further reductions, which have continued their downward slide in recent months, despite the Bank opting to keep interest rates on hold at its last meeting.
This week alone, major lenders including Halifax, Santander, HSBC, and Barclays have all reduced their mortgage rates as experts say they are “battling it out” ahead of the summer holidays as they try to attract business.
Mortgage rates tend to fall when there is an expectation that the Bank’s base rate will come down, as this pushes down swap rates – the rates at which banks lend to one another, and which influence the pricing of fixed-rate deals.
Currently, the Bank’s base rate sits at 4.25 per cent, but markets are increasingly pricing in the likelihood of two quarter-point cuts by the end of the year, with the first possibly as soon as August.
Nick Mendes of brokers John Charcol said: “While swap rates are moving down and markets remain reasonably confident that the Bank will cut the base rate at some stage this year, the next cut in August is looking increasingly likely.
“It’s important to remember, though, that fixed mortgage rates are primarily influenced by swap rates, which are driven by what markets expect to happen with interest rates in the future, rather than by the base rate itself.”
According to Moneyfacts, the average two-year fixed mortgage deal has dropped from 5.93 per cent a year ago to 5.12 per cent in June. Five-year deals have fallen from 5.5 per cent to 5.09 per cent over the same period.
However, there are cheaper deals on the market available, with sub 4 per cent offers, although they are mainly reserved for people with high equity or deposits.
But rates won’t fall further unless we have “stable, low inflation”, Emma Fildes, property adviser at Brick Weaver, said.
square MORTGAGES Britain's biggest mortgage lender among four major banks cutting rates
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She explained that many sellers and buyers have put their moves on hold recently in anticipation of lower rates. Buyers will be hoping this coincides with house price falls.
As rates fall, prices run the risk of edging back up where demand is strongest, she warned.Ms Fildes said: “Overall, there is a hesitancy around the current market due to uncertainty brought on by the economic backdrop and global activities.
“If rates reduce, it will enable more buyers to traverse the ladder, which will increase activity but only if there is movement towards stability on other fronts as well.”
The aftermath of the Covid lockdowns, combined with Russia’s invasion of Ukraine in February 2022, triggered a huge inflation spike. The Bank responded by increasing interest rates.
Mortgage rates then accelerated after the Liz Truss-Kwasi Kwarteng mini-Budget in late September 2022. After Truss resigned the next month, markets calmed down and the cost of borrowing fell, with mortgage rates dropping too.
They are now coming down but have not reached the previous lows of around one per cent.
Stephen Barber, professor of global affairs at the University of East London, said: “Combined with the slowing of price rises, interest rates have begun to fall, and the expectation is that they will continue to come down, making the cost of borrowing cheaper.
“That is true for business and for consumers taking out or paying down mortgages.”
The hope is that both will have more confidence to borrow, to invest and to spend, he said, but added uncertainty in the Middle East and the “unpredictable” Trump administration both have the capacity to disrupt the trend.
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