Mortgage market participants expect the Bank of England’s base rate to hold at 3.75% but say a rise should not be ruled out.
At the last meeting of the BoE’s Monetary Policy Committee in March, members voted unanimously to keep the key rate at 3.75%.
The decision to hold the base rate came as many MPC members decided the inflationary impact of the Middle East war made cutting rates too dangerous.
The conflict caused exchange rates to rise, raising the cost of fixed-rate debt.
Before the conflict began, lenders were pricing in a rate cut in March and expected another rate cut in 2026.
Earlier this month, inflation rose to 3.3% in the year to March, from 3% in February, as the war in Iran caused the biggest jump in petrol and diesel prices for more than three years.
At the last MPC meeting, the committee said it will continue to closely monitor the situation in the Middle East and its impact on energy supply costs and global electricity prices.
It said it is “ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target over the medium term”.
John Charcol technical director Nick Mendes believes this is “unlikely to be a straightforward decision”.
Mendes notes: “A split vote seems likely, and in some ways the split may be as important as the primary decision itself.”
“Markets are already pricing in a higher level. Two-year, three-year and five-year SONIA swaps are all sitting around 4.18% to 4.21%, and the forward curve points to the three-month SONIA moving higher in the coming months rather than an immediate pullback. That suggests markets are not treating current rates as a last resort.”
“The questions now are if there is any increase, how much the Bank should increase, and how the Bank feels it has to act quickly.”
And while the rate is expected to be held at 3.75%, Mendes says a hike this week “shouldn’t be ruled out”.
He explains: “If the MPC accepts that rates are likely to go higher, there is a case for action now rather than waiting until the next meeting on 18 June.
However, he highlights that holding doesn’t mean good news. “A firm hold, for example a 5-4 vote, will still be a big challenge. It would tell the market that the Bank is only one vote away from raising rates, and that’s not the kind of backlash that usually gives lenders hope of a tough cut.”
“We may see a reduction in mortgage rates where individual lenders seek to compete, or where exchange rates ease. But I would expect any reductions to be erratic rather than a broad change in the market as a whole.”
Meanwhile, Nottingham Building Society’s chief savings officer Harriet Guevara suggests holding on to 3.75% “now feels more likely” but says the bigger issue is how much the view has changed.
Guevara comments: “For the past few months, the markets have been very bearish.
He adds: “On the mortgage side, the prospect of price increases rather than decreases makes this an important time for borrowers to evaluate themselves. Anyone coming to the end of a fixed-term contract in the next six to twelve months should speak to a qualified mortgage broker who can assess their options and help them make the right decision for their circumstances.
