Today, the MPC announced the base rate would be held at 3.75% as the US-Iran war continued to put pressure on oil prices, adding to the prospect of higher inflation.
Once the conflict began, the markets expected the central bank to hold the base rate as a cautionary measure, reversing the original predictions that there would be at least two cuts this year.
Emma Wall, chief investment strategist at Hargreaves Lansdown, said the firm believed that while the conflict remained at elevated levels, the central banks of the EU, US and UK would hold rates, “but the downward trajectory will continue once the war is resolved”.
No clarity yet
However, as there is still uncertainty about how long the conflict will last or its outcome, Rob Clifford, chief executive of Stonebridge, said: “Borrowers have had the best outcome we could have hoped for, as the conflict in the Middle East clearly had a real impact on energy and financial markets, causing swap rates to jump.
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“The situation will have tested policymakers’ ability to weigh up how a tumultuous and, potentially, short-term crisis might outweigh the impact of longer-term trends.”
John Phillips, CEO of Just Mortgages and Spicerhaart, said it was some comfort to see the MPC sit on its hands, as there were concerns across the sector for a rate rise.
Phillips added: “That said, it’s hard to predict where we go from here and what the future path of interest rates now looks like. So much depends on how drawn-out this conflict becomes and the impact it has on prices and inflation more broadly. We shouldn’t rule out the prospect of increases in the future.”
Clifford continued on to say that UK borrowers had been protected from higher costs for now, which would support the mortgage and residential sales markets. Clifford added that it also offered some respite for borrowers coming to the end of a fixed rate term, who may be reluctant to lock in a rate higher than what they expected a month ago.
“Depending on how long the disruption to energy supplies lasts, swap rates could come down as quickly as they went up. Advisers will no doubt be watching them like hawks, as they continue to be best placed to guide their customers through a pretty fluid environment,” Clifford added.
Ben Thompson, director of home moving strategy at Mortgage Advice Bureau (MAB), said few would have been surprised by the MPC’s decision and the bank would want clearer evidence that inflation was returning to its 2% target before making further moves.
“These external pressures could mean the first cuts take longer to arrive than many had hoped. Rate movements can feel unsettling, but mortgage markets often price in expectations well in advance, meaning the impact on new deals may be less significant than many fear,” he added.
Peter Stimson, director of mortgages at MPowered, said that for all the turmoil, this was not a repeat of the chaos that followed the 2022 mini Budget, adding: “Back then swap rates took three days to spike as far as they have in three weeks this time.”
Stimson added: “How bad things get now depends on two key questions – how long the war lasts and how embedded inflation becomes.
“If the war drags on and high oil prices spread inflation across the wider economy, we will need to steel ourselves for the prospect of the bank raising interest rates and more expensive mortgages.”
Avoiding borrower panic as costs rise
Ryan Etchells, chief commercial officer at Together, said the base rate hold may not be as bad as feared, but there was “little relief” for borrowers as the mortgage market had originally been expected to “turn a corner” this year with stability, falling inflation and a rate cut.
“As a result, the property market – until recently buoyed by rising house prices and improved mortgage affordability – looks set to take a hit. Many buyers will likely hit pause on their plans, waiting for better deals to return later this year,” Etchells said, adding that it may still be a good time to go ahead with property plans, so people should not panic.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said the nation was only just recovering from the post-pandemic cost-of-living crisis, and many had been looking forward to some relief from higher living costs.
She said the rise in mortgage rates and removal of sub-4% deals had brought back a sense of urgency, causing borrowers to “scramble” for competitive deals.
Haines added that the most disappointed group would probably be homeowners with large mortgages coming off ultra-low rates secured in 2021.
Adrian Moloney, group lending distribution director at OSB Group, said affordability would remain stretched for many households, so clarity around interest rates would be as important as predictions for future reductions.
Kris Brewster, interim CEO at LHV Bank, said that even without a rate move, “households are likely to feel the impact through higher fuel costs and rising prices across everyday spending”.
Frances Haque, chief economist at Santander UK, suggested there might still be some positives, as a delay to rate cuts would impact consumer confidence, affordability and “this period of adjustment in the market will reduce competitive pressure and, in some cases, drive house prices down”.
