Interest rates cut: What it means for mortgages and market predictions

Many homeowners, first-time buyers, and commercial mortgage holders will rejoice at the Monetary Policy Committee’s decision to reduce the base rate from 5% to 4.75% — only the second base rate cut in the last 15 months. The move comes after inflation fell below the Bank of England’s 2% target in September for the first time in over three years.

However, Josh Evans, a senior mortgage broker at David Williams Mortgage & Insurance Services, says we may not see an immediate drop in residential or commercial mortgage rates, and even possibly a rise. “Banks determine their rates not just on the base rate but through market conditions, their business levels and, importantly, swap rates,” he said.

The swap rate markets are a critical factor in the cost of borrowing and are primarily based on expectations around the pace of the Bank of England’s rate-cutting cycle. Evans adds: “The swap markets reacted positively to a fall in the inflation rate in September, and statements from the Bank’s Governor alluded to a potential acceleration of their plans to bring the base rate down. However, this sentiment looks to have changed following the Autumn budget”.

Indeed, minutes published today after MPC’s decision on November 7 noted, “The Budget was provisionally expected to boost CPI inflation by just under ½ of a percentage point at its peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures.” In the short term, these higher inflationary pressures could impact the Bank’s capacity to lower the base rate sooner. The outlook suggests fewer cuts ahead, in which case swap rates may rise.

Our previous article details many changes announced by the Chancellor of the Exchequer, Rachel Reeves, as she looks to fund higher spending and investment into public services. Before this, markets were largely priced for the base rate to have been reduced to 3.75% by the end of 2025, but now the Office for Budget Responsibility, the independent treasury watchdog, has raised its prediction for the base rate by 0.25 percentage points across its five-year forecast. In line with this, financial markets have moved, predicting the base rate would reach a floor of 4% by the end of next year.

Residential mortgage rates had already risen before today’s announcement, with high street lenders HSBC, Coventry Building Society and Virgin Money among those who have re-priced their offerings. Similarly, commercial lenders have also reacted – one prominent lender, Interbay, has increased the arrangement fees by 1% across its whole product range. There may be some further movement until they settle… for the moment! Analysis and speculation will continue ahead of the next Monetary Policy Committee meeting, scheduled for December 19.

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