It's all over for interest rate cuts – get your new mortgage deal now

Independent

22-05-2025

The shock jump in inflation recorded in April looks to have killed off prospects for more interest rate cuts and put the mortgage market into the cooler.
As I wrote yesterday, the consumer prices index surging to 3.5 per cent (economists were expecting 3.3) means the City is now pencilling in just one more rate cut over the next year. Previously the expectations were for two, and maybe more.
The markets had already started to move in a negative direction after traders took note of Bank of England chief economist Huw Pill's hawkish recent speech. In it, he voiced fears that rates were not high enough to keep a lid on inflation. It wouldn't take much for the swing voters on the rate-setting Monetary Policy Committee to move into the hawks' camp after what the Consumer Prices Index had to show.
Where does this leave people trying to navigate the choppy seas of Britain's housing market, in which mortgage deals below the 4 per cent level have been available, albeit only to those seeking to borrow a maximum of around 60 per cent of their home's value?
Well, it's not ideal. Lenders had been reducing rates in the wake of the good news on inflation during the two months before April. Now the script has flipped, they'll inevitably start to look at moving in the opposite direction. That's where the interest rate swaps market, which governs the price of fixed deals, is going.
Nick Mendes from broker John Charcol explains it like this: 'Swap rates, which heavily influence the pricing of fixed-rate mortgages, have been edging up in recent days and I expect we will see further increases as markets reassess the likely path for monetary policy.
'For mortgage borrowers, this matters. We've seen lenders reduce rates over recent weeks on the assumption that base rates would begin falling steadily. But that trend could now pause or even reverse.'
Gilt yields – the rate the government pays when it issues IOUs – have also headed north, adding to the pressure on lenders. Mendes nonetheless thinks that while some will reprice 'modestly upwards to reflect rising funding costs and shifting expectations' others may hold off, at least for a while.
However, we're unlikely to see any juicy headline-grabbing new deals, and certainly none below the four per cent level. Lenders that might have been preparing to join the party will put them in mothballs until sentiment improves.
This will likely feed through into the wider housing market. There are various indices monitoring prices. At least one of those (Nationwide's) showed prices falling in April, although Halifax's rival measure reported a small increase.
Nationwide's reported fall can partly explained by the fact that the stamp duty rise imposed by Rachel Reeves, who is in a nasty fiscal jam, took effect in April. By the way, I wouldn't be at all surprised to see a further increase announced in the autumn given the latest (dreadful) borrowing figures. Reeves will have to do something if she is to stick to her fiscal rules.
The affordability of homes in this country is already stretched. Prices are frankly ridiculous, especially in the southeast. More expensive mortgages will make it worse, potentially taking still more heat out of the market. Every cloud has a silver lining, I suppose.
But remember this: sentiment can turn on a dime. It was only a couple of weeks ago that people were excitedly talking about multiple rate cuts. If the next set of inflation figures come in below expectations (it is expected to remain elevated at least for the next few months), it could reignite hopes of more rate cuts, which would feed through to the swaps market and from there to the people who oversee the pricing of home loans. Bad economic data could have a similar effect.
This may encourage people to sit on their hands. I would, however, caution them against doing that. What I've learned through watching and writing about financial markets for 25 years is this: trying to call the markets is a mug's game. Even the professionals, paid vast amounts of money to roll dice in the financial casino, regularly get it wrong – sometimes with disastrous results. You and I shouldn't even try.
See something you like in the estate agent's window that you can afford? Dive in. Shop around, grab the best deal you can find, and jump. People like the estimable Mr Mendes and his colleagues can offer advice, and that's often a good idea too.
When lenders make offers, they typically hold to them even when they're in the process of repricing, as some of them doubtless are. Given that the best deals might not last long, it would be best to strike while the iron is hot.