The base rate was held at 5.25 per cent for the fourth month in a row, a decision made on a 6-3 vote.
Two of the MPC’s members wanted the base rate to rise to 5.5 per cent, while one voted for a cut to five per cent. This decision was made along with the news that the MPC expected inflation to reach the two per cent target in Q2, before rising again in Q3.
Not the right time for a rate cut
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the MPC’s inaction was not surprising, given the rise in inflation in December.
She said: “It hardly set the stage for an interest rate cut.”
Streeter suggested that a base rate reduction could still be on the way, but that “they’ll take a bit more time to flush out”.
She added: “The Bank of England didn’t waver from the line that monetary policy would have to ‘remain restrictive’ for ‘an extended period of time’ until inflation is ‘sustainably’ at two per cent.
“Much of the broader economic picture adds weight to the argument for cuts. Growth has been stagnant, and it’s likely the economy tipped into a very mild recession at the end of 2023, with companies and consumers showing a lot more caution in their spending patterns.”
Streeter said: “The Bank’s policymakers are highly unlikely to make a move before the March Budget, given that voter sweeteners like tax cuts and duty freezes could see demand in the economy tick up. The impact of delays to imported goods re-routed from the Red Sea is still uncertain, and could tip some prices upwards.”
Max Shepherd, group economist at Yorkshire Building Society, said: “For the time being, the fear of reigniting inflation is outweighing the need to stimulate economic growth. There’s also the potential for inflationary pressure from the March Budget and ongoing tensions in the Red Sea.”
Karl Wilkinson, CEO at Access Financial Services, noted that the base rate decision was only made by a majority of three votes, “so opinion is still divided on what’s best moving forward”.
He added: “I don’t think anyone will be surprised if we stick at 5.25 per cent until the summer. Hopefully then inflation will have calmed, and we can see a lower base rate.”
Mark Harris, chief executive of SPF Private Clients, said: “We expect base rate to be at four per cent or even less by the end of the year, assuming inflation also continues to move towards its two per cent target. This would necessitate around three or four interest rate cuts, which would come as welcome news for borrowers struggling with affordability.”
What next for mortgage pricing?
There seemed to be a mixed view on what the latest decision might mean for mortgage rates. Although lenders are said to have already priced in a reduction, recent rising swap rates have resulted in some increases.
Kevin Roberts, managing director of Legal and General Mortgage Services, said: “Swap rates have ticked back up from the falls we saw towards the end of last year as markets have realised that inflation may be more sticky than expected and that the space for cuts to the Bank of England base rate might be fewer and later than hoped.
“The road ahead for mortgage pricing is therefore uncertain. Lenders remain keen for business and their pricing reflects this, but even small changes in swap rates are prompting different reactions from lenders across the market. The era of ultra-low interest rates that extended over the past decade looks to be over for the foreseeable future, and we may now be settling into a new, albeit bumpy normal.”
Rob Clifford, chief executive of Stonebridge, said that with the last inflation data, the central bank had “likely opted to keep a watchful eye on the next set of figures rather than move too soon”.
He added: “While swaps have moved back up in the last week or so, the money markets still anticipate the Bank reducing rates throughout the year, with many economists forecasting at least two quarter-point cuts at some point. As the year progresses – and specifically if inflation falls further – there will be growing pressure to bring down rates, especially the closer it gets to its two per cent target.
“Mortgage lenders spent the first half of January following each other in repeatedly cutting rates; however, this has slowed recently, and today’s decision – and the rise with swaps – will mean we see a more consistent and static mortgage rate environment in the weeks ahead.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, added that the “rapid falls” in mortgage rates had slowed down following a revision of market expectations.
She added: “The path is still downhill, and we expect cuts to keep coming, but lenders are pausing for breath. It means anyone holding out for significant falls before they buy may have a longer wait than they were expecting. For those with a looming remortgage, it means they may have a bigger mountain to climb in affording their new deal.”
Still a challenge for some
Reiterating Coles’ views, Simon Webb, managing director of capital markets and finance at LiveMore, said the base rate decision was “not great news for people on standard variable rates who were hoping for a drop in interest rates. It’s particularly tough on older generations and mortgage prisoners struggling to meet their mortgage payments.”
Paul Glynn, CEO of Air, agreed, adding: “Whilst this is great news for those borrowers who are still working, for those in or approaching retirement there are wider considerations at play.
“The cost-of-living crisis and affordability issues are still causing financial stress for many individuals on a fixed income. Rate stability is a positive thing, but it must be matched by suitable products tailored for the older generation. Advisers should be prepared to have comprehensive conversations with their customers in order to find a solution that works for them, whether that is a traditional mortgage or otherwise.”
