EXPERTS expect the Bank of England to hold its base rate at 3.75% next week after US President Donald Trump “blows up all hope of a rate reduction”.
The Middle East war is intensifying, with the US and Israel striking Iran over the weekend, and the oil price is rising – it is now higher than $100 a barrel.
Trump said the oil price rise “is a very small price to pay” – but oil getting more expensive will lead to an uptick in inflation in the UK, experts warn.
Rising energy prices will feed in to every part of the UK economy and lead to higher petrol and diesel costs at the pump.
The Bank of England is set to announce next Thursday if it holds, increases or decreases its base rate which is currently at 3.75%.
Swap rates are rising and mortgage rates are being increased by lenders to price in expectations that interest rates will go up.
Blew up all hope of a rate reduction this month
Ben Perks, Managing Director at Stourbridge-based Orchard Financial Advisers, said Trump has caused this crisis.
He continued: “When Trump dropped his first bomb on Iran, it blew up all hope of a rate reduction this month. A few weeks ago, a cut to base rate looked nailed on.
“But the ever-cautious committee will look at global events and hold fire. An increase at this stage would be unjustified, but we will wait and see what happens to inflation as energy prices look to soar.”
Mike Staton, Director at Mansfield-based Staton Mortgages, said he expects the Bank of England to hold, rather than increase, its base rate.
He added: “Mortgage rates moving back towards 5% shouldn’t surprise anyone who understands how the markets actually work. Five-year swaps hit a one-year high, lenders repriced, headlines panic, we’ve seen this movie before, and it nearly always starts worse than it finishes.
“Yes, inflation is likely to tick up again with energy and fuel prices rising due to global conflict, and that’s exactly why the markets have reacted. But markets pricing in a rate rise doesn’t mean the Bank of England will actually pull the trigger. They won’t.
“The Bank knows the housing market is fragile, confidence is thin, and the last thing they can afford right now is another rate shock hitting millions of homeowners. Last time rates moved too far too fast, the market nearly seized up overnight.”
The Bank will look at global events and hold fire
Elliott Culley, Director at Hayling Island-based Switch Mortgage Finance, said he did not expect the Bank of England to raise its base rate.
He added: “It would be counterintuitive for the Bank of England to consider raising the base rate this month. Although the price of oil has spiked, a resolution to the conflict could see prices reduce in a similar manner.
“Considering how close we were to a potential rate drop and inflation being supposedly under control, a complete 180 by the Bank of England is unlikely.”
Darryl Dhoffer, Founder at Bedford-based The Mortgage Geezer, said the “era of sub-4% mortgage deals has evaporated”.
He continued: “The Bank of England will likely hold the base rate at 3.75% on 19 March. Raising rates now could over-tighten an economy already cooling under high energy costs, risking a deep recession. The Monetary Policy Committee (MPC) prefers a ‘wait and see’ approach to ensure this spike isn’t transitory. However, the market isn’t waiting.
“Five-year swaps are at year-highs, making a jump in average mortgage rates above 5% this week feel inevitable. The era of sub-4% deals has evaporated as lenders reprice for a ‘higher-for-longer’ reality. Savers benefit from steady yields, but borrowers face immediate pain.”
The Bank is more likely to hold given the uncertainty
Richard Davidson, Mortgage Advisor at onlinemortgageadvisor.co.uk, said he expects a hold.
He added: “We imagine the Bank is more likely to hold given the uncertainty, which will be a shift from the expected cut.”
Justin Moy, Managing Director at Chelmsford-based EHF Mortgages, said we need to wait to see if the conflict in the Middle East continues.
He continued: “It’s too early for the Bank of England to make a decision based on the conflict thus far, with promises of a quick resolution still promised by Trump. Fundamentally, any push on inflation is due to the oil pricing, which has rocketed in the last few days, but can equally fall at the same speed should supply be met elsewhere.
“This is a real example of how mortgage rates are sensitive to both our economy and worldwide conflict and issues, and that the opportunity to secure rates is so important to borrowers, especially with larger average balances, even a 0.25% change is expensive.”
Photo by Charles Etoroma on Unsplash.
