It’s still four weeks until Bank of England policymakers decide on whether to increase the cost of borrowing again and the economy is already cooling fast.

As Hargreaves Lansdown head of money and markets Susannah Streeter goes on to explain, the interest rate medicine is working but with unfortunate side effects of a sharp drop in economic activity, and expectations are rising that mild recession is on the way.

There’s been a lag between the rapid hikes in rates and the impact on the business landscape but now the outlook is deteriorating fast.

The closely watched Purchasing Managers Index reading – the flash UK composite PMI – came through at 47.9 this month and anything below 50 marks a contraction. This is the lowest level in two and half years so forecasts of where interest rates will end up have been ripped up and re-assessed.

“The market consensus is still for another rate hike in September to 5.5% because wage growth came in so hot in July. There is a chance it could be the last in the cycle, but right now the market consensus is for two more rate hikes to 5.75% before the end of the year, until there’s a pause”, Streeter says.

With regards to the outlook for mortgage rates, Hargreaves Lansdown head of personal finance Sarah Coles says the PMI data has showed how worried business are about the outlook, and the market has immediately started pricing in two rises rather than three – and a lower peak.

“This isn’t going to make a major difference today to anyone on a variable rate mortgage, as these tend to rise and fall when the Bank of England moves the base rate. It’s likely to mean that the future feels a bit less daunting – because their rate is likely to be hiked less in the coming months. However, it’s still likely to be quite some time before we see these rates fall”.

Cole says this is good news for anyone looking for a new fixed rate deal, because these mortgages are based on the swaps market.

“Swap rates depend on rate expectations, so they’re likely to fall as expectations drop, and fixed rate mortgages may get cheaper”.

Fixed rate mortgages have already come down slightly from the peak, with the average two-year fixed rate at 6.74% and the average five-year rate at 6.22%, according to Moneyfacts.

Coles adds: “ They’re still eye-watering rates, but have backed off from 2 August, when the average two-year rate was 6.85% and the average over five years 6.37%.  Unfortunately, we can’t expect seismic moves in the immediate future. For that we’ll have to wait until the market expects the Bank of England to be cutting rates – which isn’t on the cards for quite some time.”