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The interest rate cut is good news for mortgage payers – now they need more

The Bank of England has cut rates by 0.25 points after a drop in the rate of inflation. The question now, writes James Moore, is how long we will have to wait for the next one

Thursday 07 November 2024 12:00 EST
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Interest rates cut by Bank of England in good news for mortgage-holders and borrowers

After a turbulent few weeks, the Bank of England delivered a soothing balm to Britain’s hard-pressed borrowers with a quarter-point cut in interest rates.

The move was widely expected and entirely justified. If you believed the forecasts – sensible folks treat them with a high degree of scepticism – inflation was supposed to be above the 2 per cent target of the rate-setting Monetary Policy Committee (MPC) of the Bank at this point.

It undershot this and all the forecasts at 1.7 per cent. Not even the dizziest of optimists expected that. The hard medicine prescribed by the Bank to restore price stability is doing its job, as the MPC observed in its minutes. They cited “continued progress in disinflation, particularly as previous external shocks have abated”.

For those with mortgages, and for those looking to take them out, not to mention the nation’s small businesses, what really matters now is what comes next. Life is still tough for them. Will there be some festive cheer with another cut in December?

The MPC’s vote went 8-1, which was a more emphatic result than I expected (the lone dissident was rate hawk-in-chief Catherine Mann). We can confidently predict that the leading dove Swati Dhingra will vote for a second cut, and that Mann will stick to her guns too. There are differing views among the rest about how much scope they have to further ease rates.

Playing into everything is the impact of chancellor Rachel Reeves’s radical, tax raising budget. The biggest money raiser came via hiking employer national insurance contributions, which is a tax on jobs because it makes hiring more expensive. This will probably be passed on via lower wage settlements. It may also result in a reduction in the number of job vacancies as businesses seek to mitigate the impact on their cost bases.

Lower wage settlements will be welcomed by the MPC (don’t get the wrong impression, I am not cheering this on). A looser labour market – I’m also not celebrating that because in plain English that means higher unemployment – could also result. The flip side is that Reeves is planning to borrow big to fund investment in the economy and has changed the way the national debt is calculated to give her the room to do this while still notionally obeying her fiscal rules. Those rules call for the national debt to fall as a proportion of GDP by the end of the current parliament.

All that extra spending is inflationary, and has resulted in the Office for Budget Responsibility raising its expectations for inflation. The Bank also expects it to add half a percentage point to the Consumer Price Index at its peak. If this is borne out, it would reduce the speed at which the Bank cuts rates.

The Budget also pushed the City’s interest rate swaps market higher – and it is this rather than base rates that governs the price of most popular types of mortgage: two or five year fixes. This reflects concerns that rates will be higher as a result of the Budget over the long term.

While the market has since eased back a bit, it is still running hotter than it was pre-Budget, which is bad news for those seeking fixes. “Borrowers should keep in mind that current fixed mortgage rates already reflect some of the anticipated Bank rate cuts over the coming year,” warns Nick Mendes, from mortgage broker John Charcol. “As a result, I foresee the lowest fixed rates stabilising around the low 3 per cent range next year.”

It will not help if the Bank sits on its hands in December, but I fear it may do that. There is a lot for the MPC to process right now. It isn’t just that Budget. There is also the direction of economic policy from the new administration in the US and what the Bank describes as “adverse geopolitical developments” elsewhere, such as in the Middle East. Life only seems to get more complicated for its members.

There is a domestic political dimension to all this too. The government would, I think, very much like to see further rate cuts to ease the national gloom. Reeves welcomed the decision while also saying she was “under no illusion about the scale of the challenge facing households after the previous government’s mini-Budget”. The MPC will want to be seen to be above that sort of political knockabout and to be doing its best for the nation by retaining its independence.

It has been slower than some of its peers to cut, arguably slower than it could have been. I still think it has the scope to cut in December and I think it probably should. But it remains deeply concerned about the still uncomfortably high level of service prices inflation (cited again in the minutes) and expects inflation to increase over the coming months.

Even after the latest reduction, the MPC’s policy remains quite restrictive but it has repeatedly talked about “gradually” reducing rates. Borrowers may have to await the new year for a fresh dose of happiness.

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