Ben Broadbent says increase already priced into markets would deliver ‘pretty material’ hit to economy
Interest rates set by the Bank of England are unlikely to rise above 5% as markets previously expected, a senior official has suggested, saying the hit to the economy from such a steep increase would be damaging.
One of the Bank’s deputy governors, Ben Broadbent, said the rise in rates priced in by markets – from 2.25% now to 5.25% over the coming months – was not a foregone conclusion and would deliver a “pretty material” hit to the economy.
In a speech at Imperial College London, shortly before Liz Truss’s resignation, he said: “Whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen.”
Financial markets began to reduce their forecasts for mortgage borrowing rates, which had leaped following the government’s tax-cutting mini-budget, immediately after Broadbent’s comments.
He said it was less clear how much pressure there would be on inflation after the government scrapped most of its tax cuts and the energy price cap was scaled back from two years to six months.
Truss’s new chancellor, Jeremy Hunt, is due to present a budget on 31 October that will set out the full scope of the government’s tax and spending policies to reassure financial markets.
Hunt, who took over from Truss’s first appointment to the Treasury brief, Kwasi Kwarteng, has said he will make spending cuts and tax rises to bring down debt and limit the impact of the budget on inflation. If the outlook for inflation as a result of the budget is lower than currently expected, interest rates would not have to rise as much.
Some analysts were sceptical that Broadbent’s speech would bring more than a short-term adjustment to rate expectations when the political situation remained volatile.
Walid Koudmani, chief market analyst at the currency trader XTB, added: “The statement by the deputy governor may provide some short-term relief, but as he stated himself, the Bank remains flexible and reactive to the need of further rate increases.
“Therefore, while this may be positive news for some, it may be difficult to assume that things will not change if the economic situation continues to worsen, particularly after recent record levels of inflation.”
Rising food prices pushed UK inflation to 10.1% in September, well above the Bank of England’s 2% target. The Bank has been raising interest rates since December last year in response to sharply higher prices.
Broadbent said the impact of a swift increase in rates would quadruple the impact of rate rises so far on the economy, causing a deeper recession than already forecast.
“If bank rate really were to reach 5.25%, given reasonable policy multipliers, the cumulative impact on GDP of the entire hiking cycle would be just under 5% – of which only around one quarter has already come through,” he said.
Investors reduced the likelihood of a full percentage-point interest rate increase by the Bank next month. They put a 17% chance on a one-point increase when the MPC next meets on 3 November, down from 25%. Instead, markets are betting on a 0.75-point increase to 3%.
A whole percentage-point rate increase was seen as a near certainty before Truss was forced to backtrack on her unfunded tax cut plans.
Uncertainty about the scale of the energy price cap plan that Hunt has said will run for only six months before being reviewed was another reason to be sceptical about raid rate rises above 5%, though Broadbent said: “We are unlikely to know for a while precisely the form that will take”.
Will mortgage rates come down after Mini-Budget reversal? We ask the experts
Mortgage rates could be about to fall, giving hope to hard-up homeowners battered by rising home loan prices.
The average price for a two-year fixed-rate mortgage is now 6.53% - the highest since August 2008.
The cost of mortgages has been rising as the Bank of England puts up its base rate to tackle rising inflation.
This base rate is now 2.25% - but was just 0.1% a year ago. This is factored in to the price of new mortgages.
Variable-rate mortgages go up in price almost straight away - though often lenders put up prices if they suspect a base rate rise is coming.
Fixed-rate home loans go up in price when they come up for renewal.
But the price and availability of mortgages rose further following a disastrous mini-Budget from former Chancellor Kwasi Kwarteng, which rattled markets.
More than five million families are set to see yearly mortgage bills rise by £5,100 on average by the end of 2024, experts warn.
The Resolution Foundation said £1,200 of that rise will be higher interest directly caused by the mini-Budget.
But mortgage experts say that mortgage rates are set to drop after new Chancellor Jeremy Hunt took action to undo a lot of Mr Kwarteng's economic ideas.
Nick Mendes, mortgage technical manager at broker John Charcol said Mr Hunt's announcements "should signal a peak for the cost of fixed rate mortgages" but that "it makes it is less clear when they will start to fall.
Mendes said mortgage rates could also drop because lenders expect something called swap rates to fall.
The important point here is that the price of swap rates has been rising, and that means fixed rate mortgage costs are too.
When mortgage lenders give out home loans, they need to get that cash from somewhere.
In the old days, mortgages were mostly just the cash building societies raised in interest from customers' current account cash.
Now mortgage lenders get the cash they lend homeowners from several sources.
One of those is borrowing money from other financial firms, then paying it back with interest.
Swap rates are what mortgage lenders pay to financial firms to get the cash they then lend consumers to buy houses.
That affects fixed-term mortgages because lenders buy 'chunks' of money over two, three, five or ten years.
Anyone with a fixed rate mortgage will recognise those numbers straight away as the length of time a mortgage normally lasts.
Mendes said: "The fall in gilt yields, assuming it is maintained, will feed through to lower swap rates and hence reduces the cost of funds to lenders."
But if mortgage rates don't fall, this could mean more pain for homeowners.
Pete Mugleston, managing director of onlinemortgageadvisor.co.uk, said: "If mortgage rates carry on rising at the same rate, more and more borrowers could fall into negative equity, meaning they owe more than what their home is worth.
"This could lead to homeowners feeling unable to sell their property, as they will still owe money once the house is sold."
Are mortgage rates starting to head lower? Major lenders including HSBC and Virgin cut them from a 14-year high
Major lenders are starting to reduce mortgage rates, after the mini-Budget pushed them up and added hundreds of pounds to some homeowners' bills.
HSBC is set to reduce rates on five-year fixed mortgages for those with deposits of 25% or more by up to 0.11 percentage points in the coming days.
It means the cheapest rate on such a mortgage with the lender will be 5.37%, down from 5.48% previously.
Virgin Money is also reducing rates from today, with the cheapest now 5.49%.
This is based on a five-year fixed rate for someone with a 25% deposit, paying a £1,295 fee.
Clydesdale Bank, also owned by Virgin, is reducing its rates for existing customers with remortgaging deposits of 35% or more by 0.1 percentage points, with the cheapest now 5.54% on a five-year fixed deal down from 5.64%.
The bank also dropped a two-year fixed product at 65% loan-to-value from 6.00 per cent to 5.90% for existing customers.
Accord Mortgages has announced that it will bring down several of its rates tomorrow (26 October) including on low-deposit products which target first time buyers.
In an email to brokers the lender confirmed it was reducing 5% deposit product rates by up to 0.52%, and 10% deposit product rates by up to 0.53%.
Slightly higher deposit products of 15% and 25% are set to come down by up to 0.35%.
The lender also said it was launching a ten-year fixed term product tomorrow.
Coventry Building Society is also set to reduce its mortgage rates, though it is not clear by what margin.
David Hollingworth, mortgage expert at broker L&C, said: 'This could be the first signs that the more stable market conditions will give lenders the chance to cut rates where they can.
'It will take some time to feed through though, as many are still dealing with a big spike in demand following the mini-Budget.'
Mortgage rates hit a 14-year high last week, after former chancellor Kwasi Kwarteng's tax-cutting mini-Budget at the end of September rocked the financial markets.
Interest increase: The price of fixed rate deals has climbed since the end of last year, but this accelerated following the Government's mini-Budge
Average two-year and five-year fixed rates hit 6.65% and 6.51% respectively.
It follows the appointment of Rishi Sunak as Prime Minister, which housing experts have welcomed saying that it could bring down government borrowing costs and return some stability to the mortgage market.
Lawrence Bowles, director of research at estate agent Savills, said: 'The uncertainty of the last few months has had a material impact on gilt rates: the rate at which the UK Government can borrow.
'In turn, this impacts the cost of borrowing for the rest of us. It affects mortgage rates for home buyers, development debt costs for housebuilders, and refinancing costs for property investors.
'Anything that helps bring certainty and confidence back to the market is likely to reduce borrowing costs.
'That, in turn, will reduce affordability pressure for households securing mortgage finance.'
However, experts say mortgage rates are unlikely to fall back to the historically low levels homeowners have enjoyed in recent years.
Tom Bill, head of UK residential research at Knight Frank, said: 'Mortgage rates may come down compared to the period following last month’s mini-Budget but a 12-year period of ultra-low borrowing costs is over.
'As demand subsides, 18 months of double-digit house price growth will also come to an end.'
A year ago, mortgage rates were at near-historic lows, with the housing market booming, banks keen to lend and borrowing costs cheap due to the Bank of England’s base rate sitting at an all-time low of 0.1%.
Since then, it has increased the rate incrementally up to 2.25%, driving up mortgage costs - though the mini-Budget accelerated this.
It means that home buyers and remortgagors who fixed their mortgage for two years in 2021 may notice the biggest increases in their monthly payments when they come to the end of their fixes and need to remortgage.
The cheapest rate available on 18 October 2021, for example, was just 0.98%.
Many will have their fingers crossed that rates start to come down in 2023, before they have to refinance.
The Bank's Monetary Policy Committee is due to meet again on 3 November, and it is expected that it could increase the base rate by 0.75%- the largest rise yet.
Experts say this could result in lenders continuing to lower their fixed rates, but pushing up their variable ones.
Ray Boulger, senior mortgage technical manager at broker John Charcol, said:
'I expect over the next few weeks other lenders to cunnounced by HSBC and Coventry.'