According to the Office for Budget Responsibility’s economic and fiscal outlook, which is published at the same time as the Autumn Statement, the average interest rates on stock of outstanding mortgages will peak at five per cent in the second half of 2024.
The OBR said that this is the highest since 2008 and 1.8 per cent above the peak in its March forecast.
The company added that average interest rates on stock of outstanding mortgages would fall to 4.6 per cent.
The OBR said that due to the large share of fixed-rate mortgages, around 83 per cent in the second quarter of 2022, higher rates of new mortgages would “take time to feed through to higher average mortgage rates on the stock of debt”.
It added that as the economy recovers, house prices will rise slightly fast than nominal incomes from 2025, approximately 2.6 per cent per year, and the house price to earning ratio would settle at around seven.
“There is significant uncertainty over this forecast given the sensitivity of house prices to mortgage rates and the recent volatility in the bond yields that drive pricing in the mortgage market,” the OBR noted.
Base rate will peak at five per cent in 2023
The OBR continued that market expectations underpinning its forecast pointed to the Bank of England base rate to rise to five per cent in a “short-lived peak” in the second half of next year.
The base rate will then fall back in the first quarter of 2024 but is three per cent higher than its March forecast.
It added that the peak for base rate is lower than immediately after the mini Budget, when the peak was predicted to reach 6.2 per cent.
“Our forecast continues to be conditioned on market expectations for base rate and not the materially lower expectations recorded in surveys of economists,” it said.
Inflation mitigated by energy price guarantee
The OBR added that it expected inflation to peak at a 40-year high of 11.1 per cent in Q4 of this year.
This is down from previous forecast of 8.7 per cent in its March forecast.
The OBR said that the peak would have been higher at 13.6 per cent, and come in Q1 next year, if the energy price guarantee was not in place.
It said that the energy price guarantee would hold inflation down next year, though the predicted increase from £2,500 to £3,000 in April next year would add one per cent to quarterly CPI inflation in the second quarter of next year.
The OBR said that it expects CPI inflation to fall back from 0.1 per cent in 2022 to 7.4 per cent in 2023.
