A Word on the Mortgage Market

What next for bank rate?

Hot off the press, yesterday the Bank of England’s Monetary Policy Committee (MPC) decided to maintain the current bank rate at 5.25%. Some people, armed with a large dollop of wishful thinking, had suggested that given this week’s announcement on inflation (more on that to follow) we may have seen the MPC cut rates but, alas, that was not to be.

However, all is not lost. The initial market sentiment, and a view that we (cautiously) share, is that we will see a cut in August. Markets are now broadly 50/50 on whether that will happen and all but certain that, if August does not bring the cut, September will. The same aforementioned markets also think that we will get a second cut in time for Christmas. To be honest, that would be great, and they don’t even need to wrap it with a bow.

Other rates

As regular readers know, we like to look across the channel and the pond to see what our European and American cousins are doing with their respective rates. Earlier this month, The European Central Bank decided to claim first mover status and cut their rate by 0.25%. Yet, in a somewhat cautionary note, in their post-cut press conference they raised their inflation expectations and, with that, all but removed the possibility of another cut soon.

Stateside, just last week, the FED maintained rates at its target range at 5.25%-5.50% for the seventh consecutive meeting, aligning with forecasts. Policymakers indicated that it would not be appropriate to lower rates until they have greater confidence that inflation is moving sustainably toward the 2% target. It also indicated that only one cut would follow this year despite lower than predicted inflation numbers.

As you will have no doubt worked out, inflation remains crucial for policymakers. Like us, you probably don’t want to hear the word inflation ever again.

Inflation (sorry)

Having (literally) just declared we don’t want to hear the word inflation again, we’ve only gone and made it a title. Sorry about that. Finally, after what feels like several lifetimes, the rampant beast has made it back to the Bank’s target level of 2%. It pays to know a little more of the detail.

Food price inflation, which was nudging 20% at its peak in late 2022, now stands at 1.7%, down from 2.9% in April. Grocery bills fell by 0.3% on the month, which will be welcome for less well-off households, who spend proportionately more of their budgets on food.

But there were also declines in the inflation rates for clothing and footwear (3.7% to 3%), recreation and culture (4.4% to 3.9%), and restaurants and hotels (6% to 5.8%) because prices rose less rapidly last month, than they did in May 2023.

Last week’s figures for average earnings showed pay rising at an annual rate of about 6%. With inflation at 2%, that means people are enjoying a chunky rise in living standards, a reversal of the trend in 2022 when inflation peaked at 11.1% and real pay was falling.

International comparisons show that the UK’s inflation rate is lower than in Germany (2.8%), France (2.6%), the EU as a whole (2.7%) and the same as the US (2%).

The bad news is that there is still some way to go before the Bank of England is ready to declare the war against inflation over and there is an expectation that it will probably move up a little in the autumn as fuel costs are expected to rise again. But not by much.

Swap rates

To remind you, as we always do, Swap rates are a type of interest rate used in the financial markets and a key determiner for mortgage pricing. Taking five-year swaps as an example, they have hovered around the 4% mark for quite some time now. At the time of writing, they have dipped slightly below this level, standing at 3.87% (to be precise). We are hopeful these should continue to nudge down in the coming weeks. Hope springs eternal, hey?