The markets were concerned the increased government spending announced by Chancellor Rachel Reeves could cause inflation to increase again, deterring the Bank of England from making the predicted 0.25% cut.
The Central Bank raised interest rates to their high of 5.25% in a bid to combat inflation. With inflation now below the 2% target, at 1.7%, the decision to make the next cut was almost certain.
But this week, some experts were being more cautious in their predictions.
Stephen Perkins, managing director at Yellow Brick Mortgages, speaking via the Newspage Agency, said: “The economy is crying out for a base rate reduction this week, and prior to the Budget this was more certain than any of the previous years’ decisions. However, gilt yields spiking and the inflationary wage and National Insurance (NI) cost increases announced in the Budget mean a reduction of the base rate is now probable rather than certain.
“It should be some months before the Budget’s impact feeds through into the inflation figures, so hopefully [the Bank of England] can focus on the here and now and cross that bridge when it comes.”
But Anita Wright, an independent financial adviser at Bolton James, was more optimistic. “The Bank of England has previously faced criticism for being slow to adjust interest rates and behind the curve,” she said.
“This experience is likely to influence their upcoming decision, as they will aim to avoid further criticism or market disappointment by delaying a rate cut, especially now the inflation figures have fallen below 2% target.
“Despite the strong likelihood of inflation returning due to factors such as the Budget, public sector pay rises and other economic drivers, the Bank is likely to proceed with a rate cut rather than maintain rates at their current level.”
What would a rate cut mean for mortgage borrowers?
According to mortgage broker, L&C, rising costs faced by mortgage lenders have prompted several to increase fixed rates. This includes bigger lenders like Skipton Building Society and Coventry Building Society whose fixed rate hikes became effective earlier this week.
Even if a cut goes ahead, it does not necessarily mean lenders will reduce their fixed-rate deals in line with this.
The fact some price hikes have taken place this week, means the advice to anyone about to take out mortgage is ‘move quickly’.
David Hollingworth, associate director at L&C Mortgages explained: “It’s confusing times for mortgage borrowers when expectation is for a base rate cut next week but fixed rates look set to rise. If market rates remain at current levels, it looks inevitable that more lenders will have to rethink their rates.
“This isn’t the radical spike in rates that have blighted mortgage rates in the last couple of years. But if funding costs don’t ease, the sub 4% 5-year fixed rates that we’ve become used to in recent months could be under threat.
“Borrowers currently considering a fixed rate option should move quickly to secure a deal as we’re seeing some rates withdraw with very little notice.”
The Bank of England is due to announce its decision on interest rates at 12pm on Thursday 7 November.
