A perfect storm: factors impacting your 2024 mortgage rate

Last month, on UK Business Forums, I suggested that: 

In December, “[Core inflation] remained at 5.1% and, on its own, might have given the [bank’s] Monetary Policy Committee pause for thought before they meet again on February 1st.

“That neither rate of [UK] inflation dipped in December may well be enough to convince the MPC that it’s too early to cut their base rate of 5.25%.”

This sentiment, it seems, is shared in many sectors of the financial industry. Yes, commentators expect the Bank of England to cut its base rate. Just not quite yet.

Global factors are too unsettled to be bullish

It’s more likely we’ll have to wait until April before we see significant movement. That’s when Ofgem’s considerable domestic energy bill cap reduction kicks in. That’s when we should see inflation drop sharply as a result. We may even see added stimulus from the Chancellor in the Spring Budget.

If only it was that simple. There’s much more going on behind the scenes (and before our eyes) today. A perfect storm, with an infinite number of potential twists, is brewing on the horizon.

Did the Bank of England get it wrong?

For all 2023, The Bank’s priority was to bring rampant inflation under control. Towards the end of last year, the Consumer Price Index did genuinely turn a corner. Hurrah!

However, inflation garnered a collective sharp intake of breath from the finance industry when it grew in December. It was such a surprise to many, but perhaps not to The Bank.

If you look at economic history, inflation and deflation are rarely linear. There are always bumps, whether the cost of living’s trajectory is primarily up or down. 

In December, multiple factors combined to give us this blip:

• the traditional pre-Christmas alcohol price rises;
• an uptick in consumption thereof around the holidays;
• a coincidental rise in tobacco prices combined. 

With the holiday period now over, inflation should at least flatline until the spring. It may even drop a little. But, that doesn’t mean we’ll see mortgage rates cut yet.

Proceeding with caution

There are already voiced concerns that the 4.0% we now see inflation at may remain sticky until domestic fuel prices decrease in April. 

The supplemental factor driving this thinking is the conflict in the Red Sea. The world’s biggest container shipping firms have withdrawn their tankers from the volatile area.

Currently, they prefer the safety of traversing South Africa’s Cape to the chicken run of the Suez Canal. Or, where feasible, shipping via air freight. 

But both these options add considerably to the cost of distributing goods. Consequently, consumers will almost certainly bear the brunt of subsequent price rises. 

These will, in turn, drive up inflation again. By how much, it’s too early to predict.

Were BoE’s inflation forecasts too high to begin with?

One argument is that the Bank of England’s forecast for inflation was too high in the first place. Given the timeframe Sunak gave The Bank to bring inflation under control, it perhaps had little choice but to over-egg its estimate.

Other factors contributed to their pricing policies, which some say skewed their base equation. Inflation in the services industry and wage growth were baked into its calculations, possibly adversely weighting its forecast for prolonged higher inflation.

Based on what it knows now, the Monetary Policy Committee (MPC) held the base rate at 5.25% today (February 1). They may well issue a revised forecast for inflation in due course. But, that doesn’t mean we’ll see a cut in its base rate so soon.

The European Central Bank says that reversal of its base rate is ‘premature’. That the BoE proceeded with similar caution today signified to industry experts that it may be early summer before we see reduced borrowing costs.

The Committee will, however, issue a revised inflation forecast to prime the market for base rate cuts closer to summer. But, before The Bank reduces the cost of borrowing, it will want to see how the reduced energy cap and increased import costs affect inflation and potentially GDP.

Will recession and/or the General Election be factors?

There are many commentators suggesting that the UK is technically in a recession already. Others are less certain, and point to a more positive outlook Whichever proves true will almost certainly affect The Bank’s policy later in the year.

Additionally, we can expect the Chancellor to provide economic stimulus at the March budget. It could be the last budget before a General Election later this year. Exactly what form that stimulus takes could depend on whether the Conservatives plan to hold the election before or after the Autumn Statement.

All things being equal…which they’re not

My opinion is that the base rate will reduce to around 4.0% by the end of the year. And, with swap rates increasing for the first time in a while last week, the cheapest mortgage rates will be similar, around 4.0%. Maybe a tad higher, despite many lenders still reducing their rates now.

The problem with that hypothesis is that everything is far from equal. There are too many players on the world stage standing on shaky ground to give any guarantees today. 

It would take a brave soul to commit to firm forecasts for mortgage interest rates and where they’re destined in 2024. I only hope that financial institutions consider their approaches and that reason sees sense. That’s not too much to ask…

…is it?

Author: John Yerou

John Yerou is the owner and founder of the award-winning Mortgage Quest Ltd and its subsidiary brands.

In 2004, John began his career in financial services as an independent mortgage advisor and broker. He's since been instrumental in negotiating bespoke mortgage underwriting criteria for professional contractors with many high street lenders.

As such, John's one of the most respected and recognisable names in securing mortgages for the UK's flexible workforce, incorporating independent professionals and the self-employed.

His recognition as the go-to mortgage expert has grown exponentially, reflected in citations and his own publications in both national and contractor-oriented press.

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