Bank cuts the base rate but mortgage interest rates ‘could increase in coming weeks’

Anyone hoping that the Bank’s decision would instantly open the floodgates to cheaper mortgages is likely to be disappointed.

In fact the mortgage rates offered both to new borrowers and remortgagers could even increase in coming weeks.

There are two reasons for this. The first is that today’s Base Rate cut of 0.25% had widely been seen as a certainty, which financial markets have been pricing in for weeks.

The second is less obvious. The swaps market – which is essentially the wholesale cost of fixed rate money that lenders offer out as mortgage loans – has been rising since mid-September.

Several lenders have even been offering mortgages at below the swap rate just to win business. Longer term, this position isn’t sustainable and mortgage rates will need to rise to reflect the current position of fixed rate money.

Whilst today’s Base Rate cut is welcome, it’s unlikely to be the turning point prospective buyers have been hoping for.

Looking ahead, rates are likely to tick down slowly, rather than tumble, given the increasing divergence between fiscal and monetary policy.

The Bank’s Monetary Policy Committee meeting noted that consumer inflation is likely to jump back up above its 2% target at the end of the year – suggesting that a further Base Rate cut next month may be off the table and a slower, more watchful ‘wait and see’ approach for 2025.

With both the UK and US Governments now appearing intent on adopting policies which, to a greater or lesser extent, are inflationary, central bank monetary policy is finding itself on a collision course as it attempts to cut interest rates while gilt and swap rates are rising.

This tension will be an interesting one to watch, and the path to further rate reductions next year is unlikely to be smooth.