More pain for homeowners as hopes of early interest rate cut dashed

There is set to be more pain for homeowners after experts warned a higher-than-expected inflation figure this morning would “hold back” the chance of mortgage rate cuts.

The Consumer Prices Index (CPI) measure of inflation fell from 3.2 per cent to 2.3 per cent in April, which was higher than economists had predicted.

Services inflation, which the Bank of England is watching carefully for signs of domestic pressures, only fell from 5.9 per cent to 6 per cent. This was much higher than the 5.5 per cent predicted.

In response, markets slashed the probability of the Bank cutting interest rates in June, reducing the likelihood from around 50 per cent to 15 per cent. A full rate cut is now only fully priced in for November. Experts warn this means mortgage rates could stay higher for longer.

Although the Rishi Sunak hailed the headline fall in inflation as a “major moment for the economy”, the prospect of a delay to interest rates cuts will be disappointing.

He and the Chancellor Jeremy Hunt are banking on an improving economy to turn around Tory fortunes ahead of an election. Key to that would be an interest rates cut in time for the effect to filter through into people’s pockets, but this will now not happen, with an election having being called for 4 July, just days after the next interest rate vote.

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“It feels as though a cut [in June] now seems very unlikely. Even a cut in August is looking a bit more doubtful,” Paul Dales, UK chief economist at Capital Economics, said on Wednesday morning, after the forecaster previously predicted a cut next month.

As well as having an effect on tracker and variable mortgages, which tend to follow the base rate, brokers said that this will have an impact on fixed-rate mortgages too.

David Hollingworth of L&C Mortgages said: “Today’s figures may bring some disappointment for those looking for signs of an imminent cut to base rate. The figures are at the higher end of forecasts and could see expectation for base rate to hold at a higher level for longer yet.

“Mortgage rates have eased back a touch in recent weeks, but today’s figures may well hold back the chance for that to become a stronger trend.

“A big fall in inflation was already expected and therefore already priced into fixed rates. Mortgage borrowers may have to wait a little longer for the base rate to fall and the recent ups and downs in mortgage rates should underline the ongoing uncertainty.”

Fixed-rate mortgages are determined by swap rates – the rates at which banks lend to one another – and these tend to go down if the market forecasts the Bank will drop interest rates sooner.

Nick Mendes of John Charcol brokers said: “Today’s announcement indicates that markets will likely price in a prolonged hold, meaning mortgage rates will remain around their current levels for a bit longer.

“It’s important to stress that until an official bank rate cut occurs, any declines in fixed rates will be gradual and steady, rather than the rapid weekly decreases seen earlier this year, as swaps have remained settled based on initial market reactions.”

And Andrew Montlake of Coreco said that the figure would “put a dent” in lenders’ plans to reduce rates.

But he added there was still reason to be positive as there was a “healthy undercurrent of competition” returning to the market.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “It feels like this should be a healthy dose of good news, but anyone with a mortgage will be sickened to hear it’s not as good as it seems. For anyone on a variable rate mortgage, nothing will change until we get rate cuts, and the timing of those still hangs in the balance. We can’t completely rule out a June rate cut, but it looks distinctly like there are still a few months before your mortgage bills drop.”

Andrew Bailey, the Bank of England Governor, said earlier this month that the Bank needed “more evidence that inflation will stay low” before rate cuts can come.

The Bank of England base rate currently sits at 5.25 per cent – its highest level in 16 years – and as a result, mortgage prices have remained high.

According to financial analytics firm Moneyfacts, the average two-year mortgage deal is 5.93 per cent, and for five-year deals the number is 5.5 per cent.

Rates were lower than this at the start of 2024. On 22 January, the average two-year rate was 5.59 per cent and the average five-year fixed mortgage rate was 5.22 per cent, as economists expected inflation to fall faster than it has done and expected multiple rate cuts throughout the year as a result.

What to do if your mortgage is about to end

As your fixed-rate mortgage period nears its end, start reviewing your options at least three to six months in advance.

Assess your financial situation, check your credit score, and compare current mortgage rates.

Most lenders will allow you to lock in a rate in this time. If rates improve, you can switch to a better one nearer the time.

Consulting a mortgage broker can provide guidance tailored to your specific need such as whether to switch to a new fixed rate, opt for a variable rate, or remortgage with a different lender.