The Bank of England lowered interest rates from 5% to 4.75% on 7 November. This was widely expected. Like many landlord colleagues, I am very keen for interest rates to fall. With inflation below the Bank of England’s 2% target – now at 1.7% – I had hoped we were quickly on track to get to a bank base rate of 3.75% next year. Many commentators now believe we will get to 4% and much more slowly.
The key driver of this change is the £45 billion of tax increases in Rachel Reeves first budget as Chancellor. Sainsburys announced on the same day that increases in employer national insurance contributions and the 6.4% increase in the minimum wage will cost it £140 million in 2025. Along with Marks & Spencers, they said that some of this might have to be passed on to customers in higher prices. In all, the bank thinks that measures in the budget will add 0.3% to inflation in 2025. Add to this an uptick in energy prices and we are likely to see inflation around 2.8% in the second half of next year. So that means that borrowing costs will have to come down more slowly.
The implications of the Trump presidency could also affect borrowing costs. Trump has promised tax cuts and that will likely increase the budget deficit in the USA and probably keep borrowing costs higher as the UK and other nations compete for capital on global markets. Tariffs could also affect growth and increase inflation. On the upside, his “drill baby drill” policy, where he will encourage oil and gas producers to flood the market, could reduce energy prices and keep UK inflation closer to 2%.
Swap rates – which govern the cost of UK fixed rate mortgages – were up by about 0.5% over the past month. Market experts are talking of Bank Base rate being cut by 0.25% per quarter going forward, so I think that means we can forget the cut we had been hoping for at the MPC meeting on 19 December 2024. I have pencilled in cuts of 0.25% at MPC meetings on 6 February, 8 May, 7 August and 6 November 2025 and adjusted my cashflow predictions accordingly. I am optimistically willing the bank to get to 3.75% by then.
With swap rates falling by about 0.25% this week in response to the Bank of England’s decision, 2 year rates are at 4.25% and 5 year rates at 4.08% today. I have 2 product switches in limbo and I had been hoping to fix to 2 year products in January after another base rate fall in December. One of them is on an eye watering Standard Variable Rate (SVR) of 7.25% and I don’t want to wait much longer. The other loan switches to SVR in January. The new financial year for lenders begins in January and I was hoping we might see some increased competition them. But given the unlikelihood of a decrease in Bank rate in December, we may see grey clouds continuing to hang over mortgage rates for some time to come.
