Homeowners face further disappointment after higher-than-expected inflation figures dampened prospects of an early interest rate cut. The Consumer Prices Index fell to 2.3% in April, down from 3.2%, but this was above economists' forecasts. Services inflation, closely watched by the Bank of England, rose to 6% from 5.9%, far exceeding the predicted 5.5%.
Markets reacted by slashing the probability of a June rate cut from around 50% to just 15%, with a full cut now not fully priced in until November. Experts warn this means mortgage rates could remain elevated for longer. The average two-year fixed mortgage rate currently stands at 5.93%, up from 5.59% in January, while five-year deals average 5.5%.
David Hollingworth of L&C Mortgages said the figures may “hold back” the chance for mortgage rates to ease further. “Mortgage borrowers may have to wait a little longer for the base rate to fall,” he added. Nick Mendes of John Charcol noted that markets will likely price in a prolonged hold, meaning rates will remain around current levels.
The news is a blow to Prime Minister Rishi Sunak and Chancellor Jeremy Hunt, who had hoped for a rate cut before the 4 July general election. Paul Dales of Capital Economics said a June cut now seems “very unlikely”, and even an August cut is “doubtful”. Sarah Coles of Hargreaves Lansdown described the situation as “sickening” for mortgage holders, though she noted a June cut cannot be completely ruled out.
Andrew Bailey, the Bank of England Governor, has stated that more evidence is needed that inflation will stay low before rate cuts can occur. The base rate remains at 5.25%, its highest in 16 years. Despite the gloom, Andrew Montlake of Coreco pointed to a “healthy undercurrent of competition” returning to the mortgage market, offering a sliver of optimism.
