Old red brick rooftops in a suburb overlooking London's financial district.
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LONDON – Britons face the prospect of higher mortgage interest rates for longer after the government's tax and spending budget beat expectations for a series of near-term interest rate cuts.
The Bank of England is widely expected to cut interest rates on Thursday, the second such cut this year. But expectations for a more pessimistic stance after that look fragile, following Finance Minister Rachel Reeves' announcement last week of £40 billion ($51.41 billion) in tax rises and a change in the UK's debt base.
UK borrowing costs rose on Thursday as investors pondered the extent of Reeves' excessive borrowing and the secondary effects of tax rises on growth and inflation. Government bond yields have since continued to rise, with the 10-year yield – which moves inversely to prices – last seen at 4.508% on Wednesday.
Mortgage rates have also been affected by uncertainty, with a number of smaller and major lenders raising mortgage rates in the hope that interest rates will remain high for longer. This comes despite a gradual decline in household borrowing costs following the Bank of England's initial interest rate cut in August – the first in more than four years.
“These are confusing times for mortgage borrowers when the expectation is for a cut in the base rate…but fixed interest rates look set to rise,” David Hollingsworth, associate director at brokerage L&C Mortgages, said in a statement on Friday.
Virgin Money became the first major lender to raise mortgage rates after the Budget, raising them by 0.15%. However, some banks were mixed on their forecasts, with Santander cutting interest rates by 0.36%. The average five-year fixed mortgage rate is now 4.64%, down from 5.36% last year, while the average two-year fixed rate is 4.91%, down from 5.81% during the same period in 2023. Data from real estate portal Rightmove showed on Thursday. .
“This is not the radical rise in interest rates that has blighted mortgage interest rates in the past couple of years. But if financing costs do not ease, the 4%, 5-year fixed interest rates we have become accustomed to in recent months may be under threat,” Hollingsworth continued. “, indicating that more lenders may reconsider interest rates in the future.
Later but further
Reeves' financial reset comes at a perceived inflection point for the Bank of England, which has so far taken a more aggressive approach to monetary easing than some other major central banks.
Economists raised their expectations for a faster pace of interest rate cuts last month after a sharp drop in inflation to 1.7% and a decline in wage growth. However, post-Budget forecasts have cast doubt on that view, with the government-funded but politically neutral Office for Budget Responsibility saying near-term economic growth and inflation now look set to remain higher.
Alan Monks, a British economist at JPMorgan, said in a note on Monday that policymakers at the Bank of England are now likely to stick to the “gradual approach” they had previously indicated to cutting interest rates. He added that interest rates could now remain 50 basis points higher than previously expected at the end of the tapering cycle.
As of Wednesday, markets expect a 97% chance of a 25 basis point cut on November 7, bringing the bank's key interest rate to 4.75%.
Analysts agreed that a cut on Thursday was still a possibility, but noted that the bank would likely take a more cautious approach after that.
“Stronger growth prospects in 2025 are likely to reduce the urgency of successive cuts in the near term,” Goldman Sachs said in a note last Thursday. Goldman now expects the Bank of England to hold interest rates steady in December, before sequentially cutting them from February to 3% in November.
Citibank on Tuesday reiterated expectations for a bond suspension in December, citing “greater financial activity” by the government as reason for caution. However, she added that a more “aggressive” approach could be expected once Reeves' plans are implemented, and predicted successive cuts from May without specifying a number of cuts.
“With fiscal policy set in our view to be a 'one-shot' game, a dovish approach in the near term still means a more aggressive tapering cycle later. Later, but beyond that, the ultimate direction of movement remains,” he wrote in a note. .
