Mortgage rates are likely to fall more slowly than expected in the new year, experts have warned, on the back of the Budget.
The Bank of England base rate is set to fall less quickly than previously thought, because the policies announced by the Chancellor are expected to add to inflation which in turn will push up the base rate.
The Treasury watchdog – the Office for Budget Responsibility (OBR) – has forecast that interest rates will fall to 3.5 per cent by 2029, but this is around 0.5 percentage points higher than it had forecast in March and 0.25 percentage points higher than it predicted before seeing the Budget measures.
In its review of the Budget the independent watchdog said the measures introduced will add to pressure on inflation and interest rates.
Higher than expected borrowing in the Budget and an increase in employer national insurance contributions which are expected to filter through in some degree to wages and consumers are predicted to add to inflationary pressures. This will in turn keep interest rates higher and impact mortgages.
This will lead to mortgage rates staying higher for longer with 1.8 million homeowners on fixed deals set to expire in the next year.
The Budget has also sparked some volatility on the financial markets with traders pushing the government’s borrowing costs higher because they expect UK debt to rise.
Economists have broadly agreed with the OBR, and told i that although they think interest rates will continue to fall – starting with the Bank of England cutting them from 5 per cent to 4.75 per cent next week – these cuts will be less dramatic than previously expected.
Ed Jones, economist at Bangor University, said: “Rates are going to fall a lot slower than expected before the Budget.
“I suspect the market is still digesting the additional borrowing announced in the Budget and the growth estimates. The Bank will want to see the market settle before making a decision, which means we don’t see any rate cuts after November until early next year.”
Dr Daniele Girardi, economist at King’s College London, added: “My view is that medium term (say 10-year) interest rates might be slightly higher than they would have been otherwise, because the Budget implies more government borrowing than expected.”
However, he added that any effect would be relatively small.
The Chancellor raised taxes by £40bn in the Budget and tweaked fiscal rules to allow more borrowing. Labour argue this is to plug a £22bn blackhole in the nation’s finances they claim was left by the Tories. This has been denied by the Conservatives.
Reeves suggested the tax rise was not an easy choice, telling BBC Radio 4’s Today programme: “Look, what alternative was there? We had a £22bn black hole in the public finances.”
She also pumped £25bn into the NHS and earmarked an extra £6.7bn for school buildings.
Sir Keir Starmer said the Government had “done the responsible thing” at the Budget by taking “difficult, tough decisions”.
He told broadcasters: “We had to do what is responsible to fix the foundations and rebuild our country.
“As I think is well understood, we inherited a £22bn black hole, money that wasn’t accounted for by the last government. I’m not prepared to simply walk past that, we have to fix it.
“So, we have done the responsible thing.”
The Prime Minister stressed that the Budget meant investment in the NHS, schools and housebuilding.
He added: “So, yes, difficult decisions, but we have scrubbed down, we have taken the difficult, tough decisions now, and I think everybody, or many people, will be in agreement that health, education and housing, and issues like that, are the really important things for our country to be driving towards.”
Stephen Millard, deputy director at the National Institute of Economic and Social Research (NIESR), said: “I think interest rates will be cut in November by 25 basis points.
“Next year, we’re expecting a gradual fall of around 75 basis points over the year. We were already a little more hawkish than the markets ahead of the Budget, and given the Budget is expansionary overall, we would now expect the markets to move up their path towards us.”
Robert Wood, chief UK economist at Pantheon Macroeconomics, said: “Reeves’s Budget increases government spending by a lot more than we and markets had expected and raises costs for employers, increasing the risk of above-target inflation next year.
“As a result, we have become more confident in our above consensus forecast for bank rate. We continue to expect the MPC [Bank of England’s rate setting committee] to reduce bank rate by only 25 basis points per quarter, until it hits 3.75 per cent at the end of next year. A 25 basis point easing next week remains likely, but we continue to expect no change in December.”
The pared back expectations for interest rate falls also mean that mortgage rates are likely to go down slower than expected, expert brokers told i.
Laith Khalaf, head of investment analysis at AJ Bell, said: “The OBR forecasts show that Budget policies will modestly push up inflation, which does make for higher interest rates, and hence mortgage rates.”
Elliott Culley, director at Switch Mortgage Finance, said that there may even be an initial rise in mortgage rates in the coming weeks because of the OBR forecasting the base rate would fall more slowly than expected.
He added: “The next Bank of England meeting is crucial now as the talk at the start of October was two base rate reductions to see out the year. If this changes and we don’t see a rate drop, or the language used by the Bank of England becomes more cautious, it could mean rates staying higher for longer as a result.”
Multiple mortgage lenders have changed their rates since the Budget, but these have included some cuts and some incrases to rates.
Halifax is the latest major lender to announce it will change its deals, with some rates increasing and some decreasing from Friday morning.
Prior to the Budget and the release of the OBR report, many expected that as well as an interest rate cut in November, there could be a second cut in the following meeting in December, but it is widely thought now there will be just the one.
This is likely to slow down the pace at which mortgage rates will fall in the new year.
However, some economists are more optimistic and believe there could be another rate cut in December. Michael Saunders of Oxford Economics, and a former Bank of England rate setter, told i: “I think the MPC will cut the base rate by 25 basis points next week. It’s fifty-fifty for another cut in December. Rates will come down to 3.5 per cent or so by the end of next year.”
Downing Street would not be drawn on the market reaction to the Budget after bond yields rose to their highest point in a year.
“It’s a matter of Government policy not to comment on market fluctuations,” the Prime Minister’s official spokeswoman said.
Asked if the Government is disappointed about the reaction after time was spent rolling the pitch before the Budget, she said: “The approach, as we’ve said earlier in the week, the approach that we took, was to ensure that there was the proper context around the steps that we were taking … what this Budget does first and foremost is restore economic stability. I think that people have heard that direct from the Chancellor.”
The Labour Party has been contacted for comment.