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Pound for Pound: markets betting on further cuts might not pay off

Journalist: John Choong (Head of Markets and Research), Newspage

ended 01. August 2024

For the first time in 52 months, the Monetary Policy Committee (MPC) finally cut interest rates to 5%. Financial markets are now pricing in as many as two more rate cuts for the rest of the year. As a result, gilt yields (a leading indicator for mortgage rates) continued to trend down, and are now in range of a year-to-date low. However, the Bank of England's (BoE) forecasts for inflation and economic growth could present a roadblock for the slew of rate cuts coming from lenders as of late. This could lead to a potential slowdown in the mortgage rate-cutting cycle going into the autumn, especially if inflation proves to be hotter than forecasts.

Bank staff continue to see headline inflation trend above target for the rest of 2024. This was always their base case. However, they now estimate the Consumer Price Index (CPI) to peak higher than stated in their previous Monetary Policy Report. In this instance, headline inflation is now expected to peak at 2.7% in Q1'25, rather than the 2.6% expected in the May report. This is down to stickier services inflation than initially estimated.

Considering how big of a factor services CPI is to the MPC's decision-making process, this will be the linchpin for where the housing market heads in the coming months. Having previously projected services CPI to drop to 4.7% by September, the new forecast doesn't look pretty, as members only foresee it dropping to 5.5% by then, and only to 5.3% by December. This is a far cry away from the pre-pandemic average of 3% that's consistent with 2% headline inflation.

Aside from that, the BoE have upgraded their annual GDP growth rate. They now predict the economy to grow more than previously forecasted for the rest of the year, with Q3 (1.5% vs 0.5%) and Q4 (2.0% vs 1.1%) GDP growth approximately double of what had been disclosed in May's report.

The labour market is also set to remain tight, with unemployment not budging above 5% for the foreseeable future. Although, it's worth noting that there's a disconnect between market expectations and the Bank's estimates, with the latter seeing a huge potential uptick in unemployment to as high as 5.7% by the end of 2026.

Be that as it may, a silver lining remains — this was Jonathan Haskel's (the MPC's most hawkish member) final meeting. This means that the committee will be going into its next meeting with one less hawk. Therefore, September's meeting may look more encouraging for those clamouring for more rate cuts, as a vote split down the middle would ultimately be decided by the Governor himself, Andrew Bailey, who voted for a cut today.

Still, Bailey stated on the press conference that the MPC are likely to keep rates at a restrictive level for longer in order to eradicate the sticky elements on services and pay inflation. Thus, judging by the central bank's outlook for services inflation, the case for more rates cuts may be put on pause for the time being.

The Governor also mentioned that committee members are unlikely to cut too heavily or quickly, which could see markets getting too ahead of themselves once again, just as they did earlier this year. Nonetheless, the proof will be in the pudding, with two inflation prints before the next MPC meeting.

6 responses from the Newspage community

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Ken James
Director at Contractor Mortgage Services
The Base Rate has fallen and swap rates have reacted favourably, but now is not the time to get carried away. With so many variables affecting the decision of the MPC, we will probably see a metered and slow approach to any more cuts, unless inflation surprises to the downside.

Lenders continue to reduce rates which will fuel the mortgage markets. And with data suggesting house prices are on the rise, some prospective buyers may decide to get on the ladder sooner than they may have been intending, which will lead to a more invigorated market.
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Riz Malik
Independent Financial Adviser at R3 Wealth
With another cut or two likely before the year is out, those who have tried to sell over the last year and failed are likely to come back to the market. On that basis, higher competition and activity are increasingly likely. This should see house prices creeping back up again.

As such, the golden time to buy may have passed, and could have been one that only lasted a few months.
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Chris Barry
Director at Thomas Legal
Slow and steady has to win the race here. The 100-year average for the Bank of England's Base Rate is 3.5%, which is a healthy target. However, it's one that needs to be achieved based on the balance between economic growth and inflation.

Today’s news is positive for three reasons. Firstly it makes borrowing cheaper for clients. Secondly, it installs confidence in the market. But perhaps most importantly, today's rate cut decision could result in another one by the end of the year, and could give the housing market a much-needed boost.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
Today's Base Rate cut was badly needed given the positive data and low inflation figures. The economy and the housing market needed it. That said, the Bank of England are nothing but cautious, so I would not expect another cut at the next meeting as the MPC will want to see the impact of this rate cut on inflation before considering further easing any further.
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Adam Stiles
Managing Director at Helix Financial Partners
The Bank of England's rate cut is a very welcome outcome and has been a long time coming. Let's not get ahead of ourselves, however, as any further rate cuts will very much be a case of wait and see.

Still, the positive news of today's cut will be a big shot in the arm of the property industry, and we expect to see a large amount of activity off the back of it. Any further rate cuts would be welcome, but let's be thankful for what we have right now!
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William Page
Head of Global Sales at IP Global
While there is no doubt the language from the BoE indicates there could well be a pause before the next rate cut, markets have so far reacted negatively to this rhetoric. Only time will tell whether inflation will hold firm, thereby allowing the BoE to continue with further cuts.

In the meantime, I expect mortgages rate to rise slightly, although most lenders will be waiting for a further rate cut before the next round of reductions. That said, don’t underestimate the impact this will have on those currently renting that are desperate to get on, or back on, the property ladder.

I expect fixed rates to sharpen, and significantly again, once a second rate cut is announced, which is still widely expect to happen in 2024. As such, a significant increase in housing activity should follow in the comings months, as there is a huge amount of built up demand from home owners, with investors also looking to get ahead of the curve over the coming weeks before the rush.