The Bank of England’s Monetary Policy Committee (MPC) decided to hold the base rate at 5.25 per cent for the third time running.
The decision was widely expected by the markets, and it has been suggested that the base rate has reached its peak.
While this has followed falling swap rates and consequently mortgage pricing, industry commentators have said borrower finances may still be under pressure.
Base rate decision will maintain ‘status quo’ and will stay ‘elevated’
Andy Sommerville, director at Search Acumen, said the decision was not surprising, adding: “For the property sector, we expect this decision to maintain the status quo, keeping property prices stable in the short term, but still leaving people feeling tangibly no better off.
“Though progress has been made to fight the ongoing inflationary pressures, the very high cost of borrowing remains a barrier for homebuyers and real estate investors alike.”
He added: “This, coupled with affordability issues as prices remain high, especially for first-time buyers, means we are unlikely to see growth in either market. Despite this, steady rates and some stability can provide a sense of reliability in uncertain times. Compared to the consistent increases we have seen previously; this may be settling for some.”
Matt Surridge, sales director at MPowered Mortgages, said it was likely that rates would stay “elevated” over the next 12 months and the continued impact of the cost of living would put pressure on finances.
“UK Finance data shows that 900,000 borrowers will experience ‘severe mortgage rate shock’ in 2024 when their existing fixed rate deals come to an end with monthly payments set to rise by more than £1,000 for some. This is worrying, which is why we believe rates need to come down at a much faster pace than is currently forecast,” he added.
Andrew Gething, managing director of MorganAsh, said the hold marked a “stable end to an intense year for borrowing” but added: “This doesn’t mean it’s all plain sailing from here, with many homeowners and consumers set to feel considerable pressure in the coming year.
“That is especially true for the more than a million homeowners set to remortgage in 2024 onto an improving, but much higher rate than they are used to.”
He warned that firms should be alert to any signs of difficulties.
Gething added: “With the FCA’s own data suggesting that half of all UK adults are vulnerable, there’s every chance that firms could see a growing proportion of vulnerability among their customer base.”
John Phillips, CEO of Spicerhaart and Just Mortgages, said: “We mustn’t forget that [mortgage rates] will still be higher than what many clients perceive as ‘normal’, highlighting the real need for brokers to be proactive in educating clients on the realities of today’s market and what it means for them and individual situation.
“This will continue to be a big focus for the year ahead, as affordability will likely remain a key challenge for many borrowers.”
Central bank prepared to tighten policy
The MPC’s decision was split 6-3, with the minority voting to increase the base rate by 0.25 per cent to 5.5 per cent.
Although inflation is set to fall in next week’s figures, the MPC said persistent inflationary pressures were evident and policy would need to be “sufficiently restrictive for sufficiently long” to return to the two per cent target. It also said further tightening of monetary policy may be needed.
This is the first time in 15 years that the base rate is higher than inflation, which fell to a two-year low of 4.6 per cent in October.
Jill Mackay, saving specialist at Scottish Friendly, said the wait for the first base rate cut in nearly four years continued and “the MPC seems no closer to changing tact”.
She added: “It was thought that the MPC may be inclined to lower base rate sooner following the UK’s unexpected drop in GDP in October, but in fact, some members of the committee voted to hike rates once more.
“Inflation remains the main sticking point and you suspect that it will have to continue its downward trajectory in the early part of next year before the bank decides to take any action.”
She said mortgage rates were “fairly steady” for now and although the markets predicted pricing to fall by as much as 1.25 per cent next year, “knowing what will happen beyond that is difficult to say”.
Concerns for the economy
An increase in inflation would be a “sticking point,” said Adam Oldfield, chief revenue officer of Phoebus Software, and the “unexpected fall in GDP has certainly given economists pause for thought”.
George Sweeney, deputy editor at Finder.com, said the GDP figures “nearly threw a spanner in the works” as economic growth fell below the zero growth expectation and contracted by 0.3 per cent.
He added: “A shrinking economy combined with interest rates remaining at current levels leaves us teetering on the brink of a recession.
“The possibility of a recession feels even more likely when you take into account the fact that around 1.6 million mortgage deals are expiring next year, according to UK Finance. A continued reduction in household disposable income due to higher borrowing costs coupled with an already slowing economy isn’t ideal, but it could mean we’re near the bottom of this downward cycle.”
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the Bank of England was not “budging from the summit” as stubborn inflation was still a worry.
She added: “It looks like we are set to be stuck on this cold high plateau for some time. The descent, when it comes, is likely to be gradual rather than a vertiginous drop.
“The timing of any cut will depend on treading the delicate balance between cooling inflation and supporting the economy, given that stagnation conditions have bedded in. If we get more weakness than is currently expected, that might encourage the Bank of England to cut rates sooner.”
