Analysis: What does the Bank of England’s interest rate decision mean for mortgages?

The Bank of England held interest rates steady at 4.75 per cent on Thursday in a move that could push back further rate cuts.

Economists and traders now expect that February may see the next rate cut, although it could be even later next year.

The move to hold the rates by the central bank keeps them at the highest they have been since the financial crisis.

Henry Knight, managing director at Springtide Capital Mortgage Brokers, said: “Forecasts for interest rates in 2025 suggest a downward trend, with predictions of the base rate falling to around 3.5 per cent.

“This decline is anticipated to translate into lower mortgage rates, benefiting both new purchasers and those looking to refinance.”

Bumpy ride for borrowers

For borrowers, it means a longer wait to switch to a cheaper rate, and potentially a bumpy ride in the meantime.

While mortgage rates are informed by the Bank’s base rate, they are also a product of competition and demand for business between banks.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “The trend in new mortgage pricing is downwards but mortgage rates are likely to continue to yo-yo over the next three months.

“Swaps [which are used by lenders to price mortgages] have been gradually falling for a month but all those falls have been wiped out over the past three days.

“It is only when we start getting regular base rate cuts that the market will react favourably and swap rates will fall.”

The Bank’s base rate was kept level after it was revealed earlier in the week that inflation in November rose to 2.6 per cent, above the central bank’s target.

The Bank’s Monetary Policy Committee voted by a majority of 6–3 to maintain the rate at 4.75 per cent. Three members preferred to reduce Bank Rate by 0.25 percentage points, to 4.5 per cent.

The central bank uses higher interest rates as a tool to try and tame inflation, forcing families to spend more on borrowing rather than pushing up the prices of goods.

Another pressure on inflation comes from rising wages. Pay packets are now growing at 5.2 per cent, up from 4.9 per cent three months ago, according to data from the Office for National Statistics released earlier this week.

Money market traders have pushed back their expectation of a rate cut to May if no cut comes in February.

‘Palpable blow to households’

Higher rates for longer are a blow to borrowers, said Suren Thiru, Economics Director at the Institute of Chartered Accountants in England and Wales, although the main news could be the Bank backing itself into a corner.

If inflation keeps creeping up and growth stays low - that’s stagflation - it could make raising rates tricky.

“The bank’s decision to keep interest rates on hold, while expected, will still come as a palpable blow to households battling with burdensome mortgage bills and businesses facing a jump in costs following the autumn budget.

“The split vote decision and the dovish tone of the minutes suggest that a February interest rate cut remains very much in play, if not yet a done deal.

“The Bank of England risks backing itself into a corner over the pace of policy loosening because, with inflation likely to drift higher, the timing of future interest rate cuts could become increasingly complex, especially if stagflation fears become reality.

“Against this backdrop, rate setters are likely to take baby steps in cutting interest rates over the next year, particularly in the face of growing domestic and international inflation risks.”

Chancellor Rachel Reeves said: “I know families are still struggling with high costs.

“We want to put more money in the pockets of working people, but that is only possible if inflation is stable and I fully back the Bank of England to achieve that.

“Improving living standards across the country is our number one focus, and is why I chose to protect working people’s pay slips from tax rises, froze fuel duty and increased the national living wage for three million people.”

“Against this backdrop, rate setters are likely to take baby steps in cutting interest rates over the next year, particularly in the face of growing domestic and international inflation risks.”