It emerged this morning inflation held steady at 2.2% in August, further cementing the view that interest rates would remain the same tomorrow when the next meeting of the Bank’s decision-makers is scheduled.
In August the Bank’s Monetary Policy Committee (MPC) made the first cut to the Base Rate in four years, bringing interest rates down from 5.25% to 5%.
It was hoped they would make another cut at their meeting on Thursday 19 September and over the last week this began to look more likely, particularly after the GDP figures showed the economy had stalled in July.
But more recently, the sentiment has tipped towards the next cuts taking place at the end of the year.
Laura Suter, director of personal finance at AJ Bell, said: “Interest rates aren’t expected to go anywhere later this week, with the Bank broadly expected to hold rates at 5% after August’s cut. The Bank has been keen to reiterate that it will not move too swiftly to cut interest rates, meaning holding rates this month would stick to that playbook.”
She added: “After this week’s decision we then have two more decisions before the year is out, in November and December. The lack of a meeting in October means the Bank avoids the thorny issue of making a decision on interest rates immediately ahead of the Budget, and gives time to digest the government’s fiscal plans before making its next decision at the start of November.
“Regardless, interest rates are expected to end the year at 4.5% – signalling two successive cuts before Christmas.”
How will inflation sticking at 2.2% impact interest rates?
Inflation remaining at 2.2%, just inches off the 2% target, means the MPC is less likely to make a cut tomorrow.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, explained more. She said with core inflation, which strips out the more volatile items such as food, alcohol and tobacco, up by 3.6% in the 12 months to August, inflationary pressures may still be lingering. This meant the Bank of England ‘had some thinking to do’ ahead of its interest rate decision tomorrow.
“Traders have been ramping up bets that the BoE will push ahead with a second interest cut this week – though most economists still expect the base rate to remain unchanged at 5%,” she said.
Haine added: “Those pinning their hopes on a second rate reduction to ease their borrowing woes are likely to take some comfort from the number of major lenders already rolling out mortgage rate cuts.
“The number of sub 4% fixed rate deals available is on the rise, with some lenders even extending this to two-year fixes, as competition heats up. A surprise interest rate reduction tomorrow could catalyse the mortgage market even further with rates falling at an even faster pace. “
How will this impact your mortgage?
Mortgage advisers are also urging borrowers looking for a new deal to focus on the fact mortgage rates have been cut, something which will already be have been benefiting budgets long before the BoE make their interest rate decisions.
David Hollingworth, associate director at L&C Mortgages said: “Although [inflation is] above the target rate of 2%, today’s stable figure shouldn’t alter the expectations that we could see another rate cut before long.
“That is not thought likely to come in tomorrow’s MPC announcement and the decision to cut last month was finely balanced at 5-4 in favour.
“However, it shouldn’t undo any of the progress in mortgage rates which have once again been shifting rapidly as lenders have cut their fixed rates with gusto.
“That’s seen some substantial improvement in the available mortgage options with two-year fixed rates now joining the five-year deals below the 4% barrier.
“The level of competition between lenders remains intense and they’ve continued to reprice regularly to try and keep up with peers. That will help to keep rate improvements coming for mortgage borrowers, as the focus shifts to the base rate decision tomorrow.”
