Bank holds rates to homeowners’ dismay

No-one was expecting the Bank of England to pull the trigger on interest rate cuts on Thursday 9 May – and the ratesetters stuck to the playbook. But what’s of more interest is the detail on the rate decision – the fact that two members voted for a rate cut compared to one last time represents a slight shift in attitude. It means we’re one step closer to the target of interest rate cuts, even if it might be months before it comes.

It’s no surprise that the MPC references the US and the path to interest rate cuts over the pond in its commentary. There has been a lot of focus on which of the Fed, the ECB and the BoE will move first on rates – and the UK’s ratesetting committee appear keenly focused on the fact that the Fed has effectively ruled itself out of being first past that finish line.

But as more months pass there is an increasingly low chance of any sizeable cuts to interest rates in the UK this year. The Bank is now modelling that rates will still be 5.2% in the second quarter of the year, up from the forecast of 5% it made in February this year. Equally, rates are expected to still be at 4.5% in the second quarter of next year, compared to the 3.7% that was being forecast in February. It feels almost absurd that at the start of the year markets were pricing in a cut to around 4.5% by the end of the year and that the first cut would be at the 9 May meeting. Now that timeline for the first rate cut has been pushed out to June, August or even September and there is a very low chance that we’ll see more than a few cuts in 2024.

The real impact of this delay will be felt by homeowners, who will have to endure higher rates for longer. It means more people will come off their cheap mortgage deals and onto higher interest rates before Base Rate is cut. It also means that those people who gambled on a tracker deal at the start of the year, in the hope of imminent rate cuts, will have to pay their mortgage on higher rates for longer.

And even if we do see a 25 basis point cut to rates from next month, that’s not going to make a huge difference to homeowners’ monthly costs. Someone with £400,000 of mortgage borrowing over 25 years would save around £60 a month if they saw their mortgage rate cut by a quarter of a percent – a helping hand but not a huge saving. At £250,000 of borrowing over 25 years that 25 basis point cut equates to around £35 a month in savings – the same as a family takeaway.

Rishi Sunak and Jeremy Hunt will also feel the impact of this delay – with a general election looming they were likely hoping for a more positive story to tell about individuals’ finances. While inflation may have dropped to at or near target by the time any election is announced, people’s mortgages will still be sky high – which is an issue that they will remember at the ballot box.”

Mortgage arrears

The interest rate decision landed shortly after data from UK Finance showing that 20,000 more people were in mortgage arrears in the first quarter of this year when compared to the year earlier. The figures showed a 26% jump over the past year in the number of homeowners falling into official arrears.

But the official definition of arrears flatters the figures, as homeowners are only classified as behind on their mortgages if they owe more than 2.5% of the mortgage value in arrears – for a £400,000 mortgage that would mean they were £10,000 behind on their payments. Because of this classification it’s likely there are far more people who are slightly in arrears and will appear in the figures in coming months.

These figures show the ugly impact of higher interest rates for longer. And with no rate cut, it’s clear these arrears figures will keep rising. Even once rates have been cut for the first time, while the drop in mortgage rates is welcome, anyone coming to the end of a two or five-year fixed-rate deal will still find they are facing far higher costs – which understandably will be unaffordable for many.