UK inflation has slowed to 2 per cent in May, its lowest level since July 2021, aligning with the Government and Bank of England’s target rate. This drop in inflation has sparked hopes that it could lead to cuts in interest rates, subsequently reducing mortgage costs.
Chancellor Jeremy Hunt expressed his hope that the Bank of England will now reduce interest rates to help lower mortgage expenses. However, despite inflation returning to the target, experts believe that the Bank of England is likely to delay any interest rate cuts until after the General Election on 4 July. Economists have already indicated that a reduction may not happen until the autumn.
Interest rates serve as a tool for the Bank of England to control inflation. As of June 2024, the rates are set at 5.25%, having remained steady for the past six votes by the Bank’s policymakers. The rates were increased to curb borrowing by companies and individuals, thereby reducing demand for goods and aiding in slowing inflation. Rate-setters at the Bank consider the overall inflation rate and specific areas like services inflation, which stood at 5.7% in May, to make their decisions.
Interest rates directly impact mortgage rates, which are agreed upon between borrowers and lenders. Most mortgages are influenced by changes in the Bank of England’s base rate. Types of mortgages like discounted, tracker, and Standard Variable Rate (SVR) mortgages typically adjust with base rate movements. For instance, a tracker mortgage set 1% above the base rate would see its rate shift in tandem with base rate changes. In December 2021, this would mean a 1.1% rate, rising to 6% by June 2023.
Fixed-rate mortgages, on the other hand, maintain the same rate for an agreed period regardless of base rate fluctuations. Once this period ends, borrowers transition to the lender’s SVR, which is influenced by the Bank of England’s rates. The rapid adjustments in mortgage ranges, including repricing and withdrawals, have led to a decrease in the average shelf-life of a mortgage to just 15 days.
Although the decline in inflation brings optimism for potential interest rate cuts and lower mortgage costs, significant changes are unlikely to occur until after the General Election. Borrowers should stay informed and prepare for possible adjustments in mortgage rates in the near future.