- CPI inflation fell to 2.3% in April, above expectations of 2.1%
- Markets show a 16% chance of a rate hike in June, up from 60% last week
Bank of England base rate cuts next month now look increasingly unlikely after inflation exceeded expectations.
The Consumer Price Index measure of inflation was 2.3 percent in April, higher than market predictions of 2.1 percent.
While inflation has now fallen to its lowest level since summer 2021, it remains above the Bank of England’s target of 2 per cent.
We’re almost there: CPI inflation fell sharply to 2.3 percent in April, but beat expectations of 2.1 percent
This has led many to speculate that the Bank of England will now keep the base rate at 5.25 percent for the seventh consecutive time when it meets again on June 20.
The market now suggests a 16 percent chance of a rate hike in June, up from 60 percent last week, according to Reuters.
The higher base rate has led to higher mortgage costs for many, especially those who have needed to remortgage.
Up to 1.6 million mortgage borrowers are paying off their fixed rate mortgages over the course of this year, many of whom will currently have a rate of 2 per cent or less.
Today’s inflation reading means people looking to buy or remortgage will likely have to wait a little longer to see any significant change in interest rates.
The average two-year fixed mortgage rate is now 5.93 per cent, according to Moneyfacts, and the average five-year fixed rate is 5.5 per cent.
The cheapest five-year fixes are all above 4.3 per cent, while the lowest two-year fixes are all above 4.65 per cent.
David Hollingworth, associate director at L&C Mortgages, said: “It is good news to see the headline inflation rate falling much closer to the Bank of England’s target rate, but it may also bring some disappointment for those looking for signs of a cut. imminent”. at the base rate.
‘The figures are at the upper end of forecasts and could dampen expectations that the base rate will remain at a higher level for even longer.
“Mortgage rates have come down a bit in recent weeks, but today’s numbers may well put a damper on the possibility of that becoming a stronger trend.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, adds: ‘It’s a shame that what is essentially positive news is seen as disappointing.
“There is a sense that some buyers and sellers are waiting for that first rate cut before taking action.”
So will mortgage rates rise?
Ultimately, the price of fixed-rate mortgages depends less on what happens to the base rate next month and much more on where markets predict it will be over the long term.
In terms of mortgage prices, market interest rate expectations are reflected in swap rates.
These swap rates are influenced by long-term market projections for the Bank of England’s base rate, as well as the broader economy, banks’ internal objectives and competitors’ pricing.
Lenders use Sonia swaps to price mortgages. As of May 21, two-year swaps were at 4.49 percent and five-year swaps at 3.96 percent.
Unless these swap rates fall, it is unlikely that we will see significant changes in mortgage rates.
Mortgage expert: Mark Harris says there is a feeling that some buyers and sellers are waiting for that first rate cut before taking action.
First, because from a historical perspective, it is very rare for lower-priced fixed mortgage rates to fall below swap rates, although it did happen in January for a very short period of time.
And second, before the rapid base rate increases between December 2021 and August 2023, lower mortgage rates were trending higher than the base rate. That was the case at least between 2008 and 2022.
This suggests that even if the base rate eventually stabilizes between 3 and 4 percent, we should expect mortgage rates to be higher than the base rate when things calm down again.
The view among mortgage brokers is that rates are unlikely to change much, at least for now.
“A big drop in inflation was already expected and therefore already priced into fixed rates,” says Hollingworth.
‘Mortgage borrowers may have to wait a little longer for the base rate to fall and the recent ups and downs in mortgage rates should underline the current uncertainty.
“Waiting and hoping rates will go down could create hurdles for homeowners.”
Mark Harris adds: “Some momentum has emerged over the last two weeks, with a number of large lenders reducing their fixed rate mortgages following the fall in Swap rates.
‘Five-year swap rates rose this morning to 4.11 percent from 4.01 percent yesterday largely because markets have pushed back expectations of a rate cut, so we will see if this trend continues in the future. short term and what impact it has on mortgage rates. .’
