The Bank of England has predicted that the base rate will be further reduced this year due to a larger-than expected fall in consumer price inflation. This is good news for homeowners.
CPI dropped from 2.2% in the previous year up to August, to 1.7% in September. Analysts in the City had predicted that CPI would fall to just 1.9 percent, while Bank of England forecasted a slightly smaller decline to only 2.1 percent.
Bloomberg reported that the financial markets now expect a Bank of England cut to its base rate of 0.42 percent points by the end of this year. This is up from the 0.35 percent points forecasted before the CPI was released. The base rate has increased 14 times, from a record-low of 0.1 percent in December 2021 up to 5.25 percent in August 2023. In August of this year, it was reduced to 5%.
Lindsay James, from investment firm Quilter Investors, said that the conditions were ripe for a rate cut in the Bank of England’s next decision early in November and perhaps even in the following one in December.
If the Bank rate were to fall, it would result in lower mortgage payments for approximately 1.27 million homeowners with variable-rate mortgages.
The market expectations are also important for fixed-rate agreements, because they help determine the amount that banks will have to borrow to be able to lend us. Banks price their loans using swap rates, which are based off of expectations about where Bank Rate will be in future.
The two-year swap has increased from 3.86 percent to 4.02 percent on Monday since the end of September. The markets were uncertain about how much interest rates would fall in the coming years. Some lenders such as NatWest, Santander and Co-op Bank have increased their fixed rates by up to 0.3 percent points over the past week.
This slight increase in rate expectations has stopped the price war that was taking place between lenders, which had been driving down fixed mortgage rates during the summer. The lowest 2-year fixed rate, for example, fell from 4.76 percent in August to just 3.84 percent at the beginning of the month. However, it has now risen to 3.9 percent this week.
David Hollingworth, a mortgage broker at L&C, said: “Many banks have raised rates.” If the inflation data is better than expected, this could help stabilize mortgage rates.
The borrower doesn’t need to bet on the outcome of this for their mortgage. You can secure a new deal with another lender if your current one is ending within the next six-months. If something better becomes available, you can still get a new mortgage.
You might have to wait longer if you want to stay with your lender and avoid the hassle of affordability checks. NatWest offers six months, while most of the major lenders offer three to four months.
Savings are affected by the CPI’s larger-than-expected drop. This is good news, as it means that your real returns will grow. If you deposited £10,000 into a 5-percent savings account a year earlier, your “real” money value would be £10274 at a CPI of 2.2%. If the CPI was 1.7 percent, your money would have grown to £10 324. The CPI could be a sign that rates are going down.
Moneyfacts, a financial data company, said that 1,731 savings accounts were available to beat inflation. This is up from 1,606 in the previous month. The savings app Chip offers a 5 percent rate on easy-access accounts. Union Bank of India also offers a 5 percent rate on bonds for one year with a deposit of at least £5,000. Atom Bank, which is based on an app, has a 4.6-percent rate on two-year bonds.
These fixed rates may fall if a rate cut is imminent, so it’s best to lock in a deal as soon as possible. The Bank rate will likely remain the same until it is cut. However, Easy-access deals and other variable rates may stay competitive if firms compete to hold on to customers’ money.
Moneyfacts’ Caitlyn eastell said that it is important for savers to act quickly if they want to lock in a good deal. Base-rate reductions are expected this year and banks could be eager to pass along rate cuts. Only a few deals are available that pay around 5%. The majority are variable rates, which are more susceptible to rate changes.
Keep some cash in your account, typically three to six month’s worth of expenses, and make sure it is the highest-paying, easy-access one you can find. You could also consider putting any additional money into a bond in order to protect your returns.
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