Bank of England to hold base rate this week – shock forecast – Introducer Today

Bad news – the Bank of England is widely expected to hold its base rate at 5.0% when its Monetary Policy Committee meets on Thursday.

Since the August meeting, at which the MPC agreed a small cut from 5.25%, unemployment and inactivity have fallen, while employment has risen – signs of economic strength that made a cut less likely according to business consultancy Hargreaves Lansdown.

Wage growth slowed, but remained ahead of inflation – so it remains a potential inflationary risk, making a cut less likely. Inflation rose less than expected in July, from 2% to 2.2% – again making a cut less likely.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says: “With the economy flatlining again in July, this picture of summer stagnation is another piece in the jigsaw for Bank of England policymakers to consider when they meet next week. Even though economic growth is clearly flagging, partly as high interest rates take their toll, policymakers still look set to be wary, and keep rates on hold. 

“Although the once red-hot labour market is well on the way to cooling down, with regular pay growth (excluding bonuses) falling to 5.1%, it still might be weeks rather than days before borrowing costs come down. The rate of wage increases is still running at more than twice the rate of consumer price growth and there are still niggles of worry that those high wage bills might be passed on as higher prices for goods and services.

“Financial markets are pricing in the likelihood that the Bank will keep rates on hold this month at around 75%. Although two interest rate cuts are priced in before the end of the year, it’s looking more likely that they will land in November and December. A lot is likely to be riding on August’s CPI number, due out just a day before the big interest rate decision.’’

Hargreaves Lansdown says this represents both good news and bad news on mortgages. 

The good news is that fixed rate deals are on their way down, because the cuts expected later this year are already priced into these products. This time last year the average 2-year fix was 6.66%, whereas now Moneyfacts figures show it’s 5.52%. The average five-year fix has also dropped – from 6.15% to 5.18%.

It’s one reason why mortgage approvals have risen, and buyers are returning to the market – because the feel-good factor injected into property by the first Bank of England rate cut is backed by slightly more affordable mortgages. 

The prospect of a remortgage isn’t looking quite so hideous either now. The HL Savings & Resilience Barometer shows that remortgagers are likely to be moving from a rate of 2%-2.5% to one between 5% and 5.5%. It a less painful jump than for all those who faced a rise from less than 2% to more than 6%.

Meanwhile, there’s bad news for those on variable rate mortgages, who could easily have waited for over a year for a cut they had expected to be imminent.