Base Rate decision ‘on knife edge’ due to ‘sticky’ inflation – analyst calls for reduction
Mortgage approvals for house purchases have fallen to their lowest rate since January while net approvals for remortgaging have fallen to their lowest point in 24 years, new data shows.
According to the Bank of England’s (BoE) latest Money and Credit Report, net mortgage approvals fell from 45,400 in August to 43,300 in September and net approvals for remortgaging fell to 20,600 from 25,100. It also showed net borrowing of mortgage debt decreased from £1.1billion in August to -£0.9 billion in September – the lowest since April 2023.
Meanwhile, the ‘effective’ interest rate, which refers to the actual interest paid on newly drawn mortgages saw a 19 basis point increase and now sits at 5.01 percent.
Alice Haine, personal finance analyst at investment platform Bestinvest, commented: “Mortgage approvals continued to fall in September, dropping by almost five percent as high mortgage rates caused major affordability challenges for buyers, with continued cost of living pressures also making it harder for buyers to secure the homes they want.
“Net approvals for remortgaging, which captures remortgaging with a different lender, also saw a rapid decline in September as more homeowners stuck with their existing lender rather than switch to a new provider to avoid affordability checks.”
Mortgage approvals plunged in September due to affordability pressures
Ms Haine added: “Mortgage lending also plunged in September – a reflection of buyers treading more conservatively by shunning larger family homes in favour of smaller, lower-value homes to meet lenders’ affordability criteria. The shift in buyer appetite and uncertain economic outlook is likely to result in further weakening in mortgage lending in the coming months.”
However, Ms Haine noted: “Now all eyes are focused on Thursday’s meeting to see whether the central bank will continue holding interest rates at 5.25 percent or deliver its 15th rate hike – a decision now on a knife edge following September’s stubbornly sticky Consumer Prices Index Inflation reading, which was unchanged at 6.7 percent.
“If the BoE decides to pause again, it would deliver some early Christmas cheer for first-time buyers and homeowners looking to refinance.”
However, Ms Haine said there is room for a little optimism. She explained: “Improving interest rate expectations have already fed through to the market, with average two five-year fixed rates dropping over the past month as lenders compete more aggressively for business.
“Pair that with softening housing prices and first-time buyers may be able to secure slightly better deals, though they should be wary of overextending themselves in a falling market. Taking on a large mortgage that may be difficult to repay if a financial situation later deteriorates is unwise in uncertain economic times.”
For existing homeowners, Ms Haine said the outlook is “less rosy”. She said: “Even if the BoE pauses its tightening cycle again, a headline interest rate of 5.25 percent is still sky-high in comparison to the lows experienced just two years ago.
“Many people emerging from the cheap deals they secured before the tightening cycle are still facing a significant jump in repayments. With most borrowers on fixed-rate mortgages, the drag from high interest rates will continue to have repercussions for mortgage lending – and possibly the property market – for some time to come.”
- Advert-free experience without interruptions.
- Rocket-fast speedy loading pages.
- Exclusive & Unlimited access to all our content.
The Bank of England decided to hold the Base Rate at 5.25 percent in September
However, some analysts suggest it may be beneficial to reduce the Base Rate by at least 0.25 percent rather than pause it or raise it again on Thursday.
Writing to his 27,000 followers on X, formerly known as Twitter, Julian Jessop, an economics fellow at the Institute of Economic Affairs, said: “Almost all the talk ahead of this week’s Bank of England decision has been about whether the #MPC will raise interest rates again. In contrast, my vote would be for an immediate ¼% cut (to 5%).
“Just as importantly, I’d also vote to pause ‘quantitative tightening (‘#QT’, or the process of selling back the government bonds that the central bank bought under ‘QE’).” (sic)
Listing his three main reasons for this, Mr Jessop wrote: “1. both GDP growth and #inflation have been weaker than the Bank had expected.
“2. the Bank was already forecasting that inflation would fall below the 2% target in the medium term if rates stayed at 5¼% and above all.
“3. money and credit growth have collapsed, which tells you far more about where inflation is heading than the backwards-looking data on prices or wages.”
He added: “I’d add that I wouldn’t have voted to raise rates at the August meeting (the last increase), so consistency would also require me to vote to reverse that move now.” (sic)
Do you think the Bank of England should pause, raise or reduce the Base Rate? Have your say in the comment section.
The Bank of England will announce its decision on whether to change the Base Rate on Thursday, November 2 at 12pm.