High interest rates on mortgages are likely to remain elevated for UK homeowners in the near future, driven by soaring government borrowing costs and renewed inflationary pressures. The Bank of England is anticipated to hold off on further interest rate cuts, potentially extending the period of elevated mortgage rates.
Economists had predicted a gradual decline in the Bank of England's base rate, currently at 4.75%, possibly as low as 3% by year's end. However, rising inflation and sluggish economic growth suggest the central bank may prioritize curbing inflation, delaying rate reductions. Market expectations have adjusted downwards, with most traders now predicting only two rate cuts this year rather than the previously anticipated four.
The Bank of England's next decision on interest rates is due in February. Financial analysts anticipate a cautious approach, as rising food and energy prices could lead to renewed inflationary pressures. This is exemplified by the recent 3.4% increase in Brent crude oil prices, which could fuel further cost increases for consumers.
The combined effect of high inflation and lackluster economic growth (stagflation) creates a challenging economic environment. UK government bond yields, particularly 30-year debt, are near 1998 highs, trading around 5.24%. The higher cost of government borrowing will increase the Treasury's interest payments, potentially impacting other spending priorities. This situation also stems from investors' concern about inflation.
Consequently, the mortgage market is experiencing a period of moderate competition, despite the generally upward trend. Small rate reductions by some lenders are being seen as a response to market pressures. While further rate cuts are anticipated in the weeks ahead, the expected decreases remain modest and unlikely to substantially lower the best available mortgage rates.
