It is “increasingly likely” that the Bank of England could push the interest rate up at its next meeting on 30 July or the following one on 17 September, says John Charcol mortgage technical manager Nicholas Mendes.
This comes following renewed fighting in the Middle East. Mendes highlights it is a reminder of “just how fragile the situation remains, and we’re far from out of the woods”.
Oil prices, which had fallen back from over $100 a barrel to around $70 before the latest escalation, have jumped sharply and are now trading around $78 a barrel.
Mendes explains that this matters because oil feeds into the cost of almost everything, from fuel to food to manufacturing, “so a sustained rise pushes inflation back up”.
Markets have reacted accordingly, with government borrowing costs rising and share prices falling.
He says: “This is significant for mortgage borrowers because fixed mortgage rates aren’t priced directly off the Bank of England’s base rate, but off swap rates, which reflect what lenders expect will happen to interest rates over the next two, five or ten years.”
“Swap rates move in line with government borrowing costs (Gilt yields) since both are driven by the same expectations around inflation and future interest rate decisions.”
“When swap rates rise, it becomes more expensive for lenders to fund fixed-rate deals, and that cost typically gets passed on to borrowers through higher rates on the high street.”
“The longer hostilities continue, the greater the risk of renewed inflationary pressure, which increases the chance the Bank of England ends up raising rates rather than cutting them.”
He also suggests this would likely put a halt to the recent run of lenders cutting their mortgage rates.
He adds: “Anyone thinking about locking in a new fixed-rate mortgage should consider acting sooner rather than later.”
Lenders have continued to cut rates this week. Barclays announced it is cutting residential rates by up to 66 basis points tomorrow, while Accord and Foundation are lowering buy-to-let prices.
Competition among lenders has been heating up this week with a wave of price reductions by brands including Halifax, Nationwide and Coventry to name just a few.
