What does June UK Inflation mean for base rate and fixed rate expectations?
According to the Bank of England, the aggressive base rate increases witnessed over the last 18 months are starting to pay off in the Bank's fight against spiralling inflation. According to Pantheon Macroeconomics, UK Inflation fell to 7.9% in June, which is a "watershed moment". There is an expectation that food inflation will fall sharply in the third quarter of 2023, and together with falling energy costs, economists are predicting inflation to fall substantially by the end of this year.
What does this mean for the Bank of England's Base Rate forecasts? Dire economic data and stubborn inflation had meant that some analysts had started to predict further base rate increases over the coming 9 to 12 months, peaking as high as 7%. However, assuming inflation continues to trend downwards, it's possible that smaller 0.25% increases in the base rate could be utilised rather than the more aggressive 0.5% increases we have witnessed. Analysts are now predicting that the Base rate may peak at 5.75% or 6% due to the fall in inflation in June. The Bank of England next meets to review and set the Base rate on the 3rd of August. It's been widely expected that the Base Rate will have gone up to 5.5% at that review, but analysts are now expecting a 0.25% increase, taking the base rate to 5.25%.
What does this mean for new fixed rates, though? Well, the base rate hasn't yet reached its peak, which means that new Fixed Rates may not have reached their peak. The Base Rate is only one of many factors a Lender uses when pricing their fixed-rate deals. Looking at the variation and range in the fixed rate market today, it would seem that some Lenders have already priced in an assumption that the Base Rate will hit 6.5% to 7% over the next 9 to 12 months. It's possible that those with overpriced fixed rates may now bring their fixed rates down so that they are more in line with other Lenders who may have priced in different base rates and other economic assumptions.
While this does give us a sense of things calming down and even some light at the end of the tunnel, it doesn't change the fact that millions of Mortgage holders will be coming off very low fixed rates over the next 12 months. The Government has put in place a Mortgage Charter with UK Lenders who have agreed to allow borrowers to apply for extensions in their term or a temporary switch to Interest Only. There are a few other measures that might be available to borrowers and if you are going to struggle to make your Mortgage payments on a new fixed rate, please talk to your Lender about what options are available to you.
As always, our Brokers at Greenshoots Financial are always on hand to offer advice and guidance.