Interest Rate Cut - Experts downplay chances for next week

Prominent housing and mortgage experts are downplaying the chance of an interest rate cut following the Bank of England monetary policy committee meeting next week.

Sarah Coles, head of personal finance at business consultancy Hargreaves Lansdown, says: “The financial world is holding its breath to hear whether the Bank of England will cut rates next week. Spoiler alert: it’s highly unlikely. The market is currently pricing in a cut in August or September, although a June cut is still a remote possibility.

“The mortgage market has already priced in these expectations, which is why we’ve seen widespread rate hikes recently. As a result, if the Bank holds rates and issues a statement saying it’s in no rush to cut them, we may get very little reaction. It’s only if we get hints at potential earlier cuts that we could see some better deals emerge.

“In fact, if the cuts come in the autumn, we may not get dramatic changes to mortgage rates even then. Variable rates will fall, but with only two or three cuts expected by the end of the year, they’re unlikely to move far. Fixed rates, meanwhile, may remain unmoved until we have signs that inflation has worked its way out of the system and rates are set to go significantly lower in the foreseeable future.”

Other commentators suggest that policymakers are monitoring wage growth, which is still running at 6% including bonuses. The concern is that companies may pass on those higher costs to customers. In the services sector, inflation was still at 6% in March, with prices particularly hot in bars and restaurants.

Most analysts say the UK markets are not fully pricing in a rate cut until August or September. 

Bloomberg Intelligence’s latest Housing Pulse echoes that thought.

Iwona Hovenko, BI’s real estate analyst, comments: “Delayed expectations for Bank of England rate cuts remain the main obstacle to a full revival in UK housing, with mortgage rates reversing some early-2024 easing as best-buy five-year fixed-rate deals climbed to 4.2-4.4% vs. 3.9% or less in early 2024. Yet an improvement in the housing sentiment is clear, with activity pickup evident in several leading indicators. We continue to expect low single-digit growth in house prices this year.

“Notably – given an easing house price-to-earnings ratio as income growth outpaces prices – once mortgage rates start ease further, this could also boost mortgage affordability, breathing new life into the housing market. Though such prospects have been pushed back, with current rate expectations suggesting only limited cuts, any shift in views may be a key catalyst.”

Market expectations point to only relatively limited rate cuts in the next three years, says BI, with views for the BOE benchmark falling only to 4.5% by this time next year and about 3.8% by mid-2027. 

This looks much more hawkish than various economic forecasts for the rate reaching about 4.5% by the end of this year and 3% by end-2025 or mid-2026. 

The Monetary Policy Committee meets next Thursday and will announce its interest rate decision at noon.