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LONDON – Britons face the prospect of rising mortgage rates for longer, after the government’s tax and spending budget dashed expectations for a series of near-term interest rate cuts.
The Bank of England is widely expected to cut interest rates on Thursday, its second rate cut this year. But forecasts for a more dovish stance since then are looking shaky as Finance Minister Rachel Reeves announced a 40 billion pound ($51.41 billion) tax hike and changes to UK debt rules last week.
U.K. borrowing costs surged on Thursday as investors pondered the extent to which Reeves had over-borrowed and the secondary impact of tax increases on growth and inflation. Since then, UK government bond yields have continued to move higher, with the 10-year yield (which moves inversely to prices) last seen at 4.508% on Wednesday.
Mortgage rates have also been hit by the uncertainty, with some smaller mainstream lenders raising their mortgage rates in anticipation that rates may remain higher for longer. This comes despite a gradual fall in home borrowing costs following the Bank of England’s first interest rate cut in more than four years in August.
David Hollingworth, associate director at broker L&C Mortgages, said in a statement on Friday: “It’s a confusing time for mortgage borrowers when base rates are expected to fall… but fixed rates look set to rise.
Virgin Money has become the first major lender to increase mortgage rates since the Budget, increasing mortgage rates by 0.15%. However, the outlook for some banks was divided, with Santander cutting interest rates by 0.36%. Data from real estate portal Rightmove on Thursday showed the average five-year fixed mortgage rate is now 4.64%, down from 5.36% last year, while the average two-year fixed rate is 4.91%, down from 5.81% at the same time in 2023.
“This isn’t the big spike in interest rates that has hurt mortgage rates over the past few years. But if financing costs don’t ease, the sub-4% five-year fixed rates we’ve become accustomed to in recent months could be in jeopardy,” Hollingward said. Si continued, noting that more lenders may reconsider rates going forward.
later but further
Reeves’ fiscal reset comes at a perceived inflection point for the Bank of England, which has so far taken a more hawkish approach to monetary easing than some other major central banks.
Allan Monks, U.K. economist at JPMorgan Chase, said in a note on Monday that Bank of England policymakers are now likely to stick to the “gradual approach” to interest rate cuts they had previously hinted at. He added that at the end of the rate-cutting cycle, rates may now still be 50 basis points higher than previously expected.
As of Wednesday, markets priced in a 97% chance of a 25 basis point rate cut on November 7, taking the bank’s key rate to 4.75%.
Analysts agreed that a rate cut was still possible on Thursday, but they said the bank was likely to take a more cautious approach thereafter.
Goldman Sachs said in a report last Thursday that “the outlook for strong economic growth in 2025 may reduce the urgency of successive interest rate cuts in the near term.” Goldman Sachs currently expects the Bank of England to hold interest rates steady in December, and then continue to cut interest rates starting in February. Bank rate was cut to 3% in November.
Citi on Tuesday echoed its forecast for no change in interest rates in December, citing the government’s “increased fiscal activism” as reason for caution. Still, it added that it expected a more “aggressive” approach once Reeves’ plan was put into effect, forecasting consecutive cuts starting in May, without specifying the magnitude of the cuts.
“We view fiscal policy as a ‘one-shot’ game, and a cautious approach in the near term still implies a more aggressive tapering cycle later. Later, but further, remains the ultimate way forward,” analysts said in the note reads.
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