Bank Hints at Rate Cuts, but Don’t Expect Covid-Era Mortgage Deals
Mortgage rates are unlikely to return to the lows of 2020
Three hours ago | ShareSave | Dharshini David, Deputy Economics Editor
The Bank of England’s recent announcement offered little to excite borrowers, maintaining interest rates unchanged while hinting at potential cuts in the near future. However, it’s important to temper expectations; the return of mortgage deals reminiscent of the Covid era is improbable.
The Current Economic Landscape
– Interest Rate Stability: The Bank’s decision to keep the interest rate steady at 3.75% signals that while cuts might be forthcoming, borrowers should not anticipate rates plummeting to the historical lows witnessed during the pandemic.
– Inflation Goals: The primary goal of the Bank is to stabilize inflation at its 2% target. Officials expect inflation to align closely with this target soon and remain stable in the next couple of years.
– Economic Concerns: Sluggish growth and a soft job market are anticipated this year, with unemployment projected to rise to 5.3%. Regulatory measures such as tax increases and minimum wage adjustments have adversely impacted job creation, leading to the Bank’s acknowledgment that rates are likely to be reduced further.
Will Interest Rates Drop Soon?
Experts believe that rates are nearing what is termed the neutral level, a point where they are neither suppressing inflation nor fueling it. If inflation trends towards this balanced state, policymakers will likely proceed with caution regarding any rate cuts.
– Predictions Vary: Economists anticipate anywhere from one to three more rate cuts this year, with some even suggesting the possibility of rate increases by 2027.
– Projected Rates: If a cut does occur, the Bank’s base rate might dip to a range of 3-3.5%, which, while lower than current levels, still remains distinctly above pre-pandemic rates.
The Impact of Historical Context
– Exceptional Circumstances: Interest rates in the early 2020s were historically low due to the urgent need to support the economy amid the unprecedented challenges of the pandemic. According to Bank of England Governor Andrew Bailey, rates will not fall back to the historically low levels seen back then.
– Inflation Drivers: The ongoing inflation was significantly impacted by external factors, including the war in Ukraine, leading to surging food and energy costs. These price increases have embedded themselves in consumer expectations, influencing wage demands and future inflation behavior.
What This Means for Savers and Borrowers
So, where does this leave savers and borrowers in the current economic climate?
– For Savers: Fortunately, savers may avoid the frustration of plummeting returns on their savings, although financial institutions often seize opportunities to reduce savings rates regardless of the economic climate.
– For Borrowers: Unfortunately, borrowers are likely to face a gradual increase in repayment rates. For example, those transitioning off five-year fixed-rate deals secured during the pandemic-era lows could find themselves facing significantly higher rates. The Bank estimates that nearly 40% of residential borrowers—approximately four million individuals—will encounter similar challenges in the upcoming years, with anticipated repayment costs rising by an average of 8%.
In summary, while there may be a few rate cuts ahead, the return of the attractive mortgage deals seen during the pandemic is not in the cards. Instead, both savers and borrowers must prepare for a changing economic environment where expectations and realities may be quite different than they were just a few years ago.