‘Stars well aligned for Base Rate cut’ after CPI plunges to 1.7%, but there’s a snag

It’s tempting to regard such a big drop in inflation as the start of open season on cheaper mortgages.

Since the Governor of the Bank of England said at the start of the month that he was ready to reduce the Base Rate ‘more aggressively’, inflationary pressure has eased significantly and given the Bank a freer hand to cut further and faster.

With annual wage inflation slipping below 5% for the first time in over two years and consumer inflation now comfortably under the Bank’s 2% target, the stars seem well aligned for the Bank’s Monetary Policy Committee to make another Base Rate cut when it next meets in three weeks’ time.

There’s just one snag in this rosy picture. The swaps market, which ultimately determines how lenders price their mortgages, has been rising for the past fortnight.

So much so that one lender is currently offering a mortgage interest rate below the equivalent swap rate. Translation – it’s selling money for less than the wholesale price. Such crazy pricing is clearly unsustainable, but it also reveals the intense competition among lenders to win borrowers’ business.

Swap rates are determined by a broader range of factors than just the Base Rate, including gilt yields, which have risen sharply amid investor uncertainty about the upcoming Budget. So while a November Base Rate cut now looks distinctly possible if not probable, there’s no guarantee it would instantly translate into much cheaper mortgages.