Bank of England governor expects FOUR interest rate cuts next year – what would it mean for mortgage and savings rates?

The Bank of England governor says four interest rate cuts are likely next year as inflation eases.

The ONS revealed that inflation rose to 2.3 per cent in the 12 months to September, above what markets had forecast.

But talking to him Global boardroom conference with the Financial TimesAndrew Bailey said that despite the recent rise, he is confident inflation will soon return to its 2 per cent target.

Bailey then confirmed that the Bank of England’s central forecast calls for four-quarter point cuts in interest rates next year.

If correct, that would see the base rate fall from 4.75 percent, where it is now, to 3.75 percent by the end of 2025, and the Bank has already cut rates from a high of 5.25 percent since August of this year.

If interest rates fall to 3.75 percent, that would mark a slight change from the broader market consensus, which currently sees interest rates rising to 4 percent by the end of next year.

What could it mean for mortgage borrowers?

Those with tracker mortgages, which follow the base rate, will benefit from any and all cuts, while those with other variable deals should, with any luck, see their lenders reduce rates, although when the lender consider it appropriate.

Those nearing the end of their fixed mortgage deals over the next year and the year after will expect lower mortgage rates when they come to refinance if the Bank of England’s projections come true.

Fixed mortgage rate pricing does not react to interest rates. Instead, they stay ahead of changes in interest rates.

This means that future interest rate cuts by the Bank of England are already to some extent built into the prices of fixed rate mortgages.

This is why the lowest priced five-year fixed rate products hover just above 4 per cent, rather than above the Bank of England’s base rate of 4.75 per cent.

However, if the market believes interest rates will fall to 3.75 percent by the end of next year, instead of 4 percent, there could be room for some cuts in mortgage rates.

The lowest fixed rates are now above 4 percent, but brokers suggest borrowers could get rates below 4 percent once again if interest rates actually fall to 3.75 percent.

Chris Sykes, technical manager at mortgage broker Private Finance, said: “This is excellent news as it is probably better than many market expectations and coming from the governor of the Bank of England it is a fairly reliable source so which is more than likely to be beneficial and improve things like swaps, which will then trickle down to mortgage rates.

“A base rate of 3.75 percent would potentially give the opportunity to see rates below 4 percent return to the market if it is truly accurate.”

Ravesh Patel, director and senior mortgage consultant at Reside Mortgages agrees that four base rate cuts next year should be good news for borrowers.

“If it comes to fruition, it would signal a significant change in the mortgage landscape,” Patel said. ‘A lower base rate would likely encourage lenders to reduce rates on residential fixed-term mortgages, with some of the most competitive deals possibly falling within the 3 to 4 per cent range by this time next year.

‘However, much depends on economic conditions, including lender competition, swap rates and inflation trends.

No one will be happier with further rate cuts than homeowners with mortgages, of which there are around 2 million, according to data from UK Finance.

Buy-to-let homeowners tend to have interest-only mortgages to ensure positive cash flows. This was all well and good when they bought investments when mortgage rates were around 2 percent.

But now the average five-year fixed-rate buy-to-let mortgage is around 5.5 per cent, according to Moneyfacts.

On a £200,000 interest-only mortgage, moving from a rate of 2 per cent to 5.5 per cent means paying £917 a month instead of £334 a month.

“For buy-to-let investors, rate cuts could provide some relief after years of rising borrowing costs,” Patel added.

‘Lower rates could improve affordability and make refinancing more viable, especially for those who would not reach affordability based on stress testing.

‘However, the buy-to-let sector faces unique pressures, including higher regulatory costs, stricter stress tests and changes to tax rules.

“These factors could moderate any widespread reduction in borrowing costs for homeowners.”

Bad news for savers

While mortgage borrowers will welcome each and every interest rate cut from the Bank of England, savers, especially those without a mortgage, will feel exactly the opposite.

Rachel Springall, finance expert at Moneyfacts, said: ‘Further base rate cuts will be devastating news for hard-pressed savers as they are the ones who feel the brunt of the interest rate cuts.

‘Those savers who use their interest to supplement their income will feel left out if rates fall further next year.

‘We’ve already seen some of the biggest banks cut savings rates following this year’s base rate cuts, so savers really need to check their accounts and switch if they’re getting a raw deal.

‘Base rate cuts could create an almost apathetic attitude among today’s savers – even though the average easy access account pays just 3 per cent, the bank base rate is much higher.

“Challenger banks are offering attractive returns and it would be unwise to overlook them when they have the same protections as a major bank.”

Anna Bowes, co-founder of Savings Champion, also says it’s important to remember that these are mere predictions. The reality may be different.

‘This is an interesting statement from the governor, as it is difficult to know what will happen to the economy over the next 12 months, especially given some big events coming up, such as a new US president and planned trade tariffs that could impose. , which could cause another rise in inflation.

‘Consequently, this expectation could easily change, as has happened recently. Before the budget, markets were expecting 6.7 cuts from the Bank of England over the next 12 months, but after the budget this figure fell to 2.3 cuts, as several of the announcements are expected to have an inflationary effect.

‘The current expectation has increased to 3.28 cuts, presumably in reaction to today’s announcement.

‘As a result, it’s hard to know what will happen next, but what we do know is that fixed rates in particular have been fairly stable and in fact have risen a bit recently following the Budget.

“But this news could cause rates to start falling again, so if you can stash away some of your cash, it would be wise to do so sooner rather than later.”