Analysing the Bank of England’s Interest Rate Decision
by Adam Tovey – Director | Independent Mortgage & Protection Adviser @ Prism Mortgage & Protection Advice
The Bank of England’s Monetary Policy Committee (MPC) held their latest meeting on 9th May 2024 to discuss interest rates.
Inflation concerns have not gone away and, leading up to the meeting, there has been a noticeable tension in the mortgage market with many lenders raising fixed mortgage rates.
Despite some hopes for a decrease in the base rate, which has remained at a 16-year high of 5.25% since last August, the prevailing sentiment among economists has leaned towards caution.
Recent Changes in Mortgage Rates
Recently, there has been a broad trend of rate increases. That said, though these increases are concerning, they do not necessarily signify the beginnings of a long-term trend.
Inflation and the Economy
The Bank’s chief economist, Huw Pill, has told us that any reduction in the base rate remains “a way off”. Pill’s caution is rooted in the persistent nature of inflation, which although reduced from its four-decade peak of 11.1% in October 2022 to 3.2% last month, remains above the Bank’s target of 2% and so continues to present significant policy challenges. This suggests that the economy is not yet in a position where easing monetary policy would be advisable, without risking further inflationary spikes.
Different Opinions in the Bank of England
The MPC appears divided, though the consensus remains geared towards caution. The majority favour the maintenance of the current rate to continue combatting inflation effectively but there are some voices within the committee, like Swati Dhingra, advocating for a slight reduction.
The rate of inflation has drastically reduced – and the Bank would tell us that we can thank their previous interest rate increases for this (see blog “How the rate of inflation updates could affect mortgage rates”) – but the main concern is that lowering rates too soon could make inflation worse.
What the Markets Think
Financial markets have adjusted their expectations significantly over recent months. While the expectation remains that the Bank will reduce rates, it is thought that any possible rate reductions will now come later in the year and that they won’t be as significant This recalibration reflects a growing recognition of the challenges posed by persistent high inflation both in the UK and globally.
Advice for Home Buyers & Homeowners
If the last two or so years has taught us anything, it is that things can change.
For those looking to secure a mortgage, our advice remains the same, talk with a whole of market adviser and lock in a rate as soon as possible – if rates drop, it is often possible to switch to a lower rate without a penalty. This approach helps mitigate the risk of future rate increases and capitalises on any potential reductions if the economic climate improves.
Looking Ahead
While the Bank of England’s cautious stance may be frustrating for some, it is a necessary measure to ensure the economy stays stable and to curb inflation to manageable levels.
We’ll continue to update over the coming months as things unfold.
Keep an eye on our blog and please do get in touch with any questions.
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