The Bank of England (BoE) lowered interest rates to a 20-month low on Thursday, offering temporary relief to homeowners. Following the move, mortgage providers including Barclays, Halifax, and HSBC reduced their rates, bringing the average five-year fixed deal to 5.3%, down from 5.5% in June. However, experts warn that these benefits could be short-lived as rising inflation and economic uncertainty, driven by recent budget policies, could keep rates high for an extended period.
The BoE now forecasts inflation to rise sharply to 3.7%, up from 2.75%, mainly due to increased employment costs from April’s tax changes, including hikes in National Insurance and the national living wage. This inflationary pressure complicates the outlook for homeowners, particularly as around 1.8 million fixed-rate mortgages are set to expire in 2025, with many locked into rates below 2%. Even with a quick reduction in rates, these homeowners may face significant financial hardship.
While markets initially anticipated more aggressive cuts, the BoE’s revised growth forecast for 2025, now at just 0.75%, highlights the UK’s economic struggles. The slowdown is compounded by a potential rise in unemployment, as tax hikes and increased public spending put strain on the economy.
Economists remain divided on the BoE’s approach, with some fearing that prioritising inflation over growth could lead to smaller or fewer rate cuts in the future. Others, however, argue that the current inflationary pressures are primarily supply-side, suggesting that rapid cuts are unlikely to cause overheating in demand.
With inflation rising and economic growth sluggish, the outlook for the housing market remains uncertain, and homeowners may continue to feel financial strain for some time.
