Inflation falls, but mortgage rates rise?

Words by Peter Stimson , Head of Product, Pricing and Proposition

Today, 16th October 2024, CPI inflation has fallen to 1.7%, marking the first time since April 2021 that it has been below the Bank of England’s 2% target. As we often do when something happens to cause a stir that can impact the mortgage market, we spoke to our Head of Product, Peter Stimson, to get his insight on what that could mean for the industry. Here’s what he had to say: 

CPI, or the Consumer Price Index, is crucial because it is one of the key influencers in how the Bank of England decides to set the Bank Base Rate. The fact it is now finally below their 2% target is, naturally, extremely good news. The Bank of England meets again on 7th November, and today’s CPI data almost certainly means that we're going to get a Bank Base Rate cut of 0.25%. I think it's unlikely that it will be anything more than this simply because, at the last meeting, there was an eight-to-one vote in favour of holding the Bank Base Rate. On top of this, there are strong inflationary pressures in the background, which are likely to push CPI up again in the coming months. For example, the energy price cap is increasing, coupled with the likelihood that fuel prices will rise in the months ahead, given what's going on in the Middle East. On this basis, 0.25% is much more probable than anything larger. 

When we look at the impact of the CPI fall on the swaps market so far, 2- and 5-year swaps at the time of writing have fallen by around ten basis points, which is good news. However, this needs to be viewed in the context of swaps having risen by nearly 20bps in the 10 days prior. So, yes, swaps are down, but they're still higher than 10 days ago! As a result of those increased swap rates, we've seen lenders increasing rates, and I think we're probably going to see some lenders continue to increase rates over the next two or three days, even with swaps dropping back a little. This is simply to account for the fact that lending margins in the market are incredibly slim to non-existent at the moment. 

I've got over thirty years’ experience in this industry, and this market is among the most competitive I've ever seen. Lenders start the year with a target for how much they'd like to lend. This year has been very slow; purchases are down significantly, and lenders in the last quarter are trying to make up a lot of that ground. This is being done through lending at cut-throat margins to attract customers. Sadly, that's not sustainable long term and, ultimately, something will have to give. 

So, overall, despite the fact that swaps are dropping off and despite the fact that we're almost certainly nailed on for a base rate cut in November, I can’t anticipate this translating into lower mortgage rates just yet. In fact, due to the reasons I’ve discussed—market competitiveness, thin lender margins, and upcoming inflationary pressures—mortgage pricing may remain steady or even experience slight increases in the near future.