BOE Rate Hike Less Likely Following Surprise Inflation Slowdown

Just as concerns were growing that the Bank of England (BOE) was getting ready to raise interest rates later this year, for the first time in a decade, a weaker than expected inflation number crops up. That means home-owners and potential home-buyers can breathe a sigh of relief and enjoy low mortgage interest rates for even longer.

The Office for National Statistics has reported the inflation rate for June eased to 2.6% from May’s 2.9%. That’s the steepest slowdown in the annual rate of inflation between two months since February 2015 and gives Britons some much needed respite, as earnings growth remains meagre at best.

“There have been increasing signals that the UK’s central bank was getting closer to raising rates sometime in the next 12 months, for the first time since July 2017,” said Knightsbridge estate agent, Plaza Estates. “The surprise slowdown in the rate at which the cost of living is rising, however, suggests the BOE will stay its hand for a little while longer.”

Fuel Prices Drive Inflation Lower

The main reason behind the slowdown in the UK’s rate of inflation was a 1.1% fall in the cost of fuel. June represents the fourth consecutive month in which prices at the pump have declined, the ONS said. And, with the BOE’s main rate of interest now more likely to remain at 0.25% for some time to come, mortgage interest rates will likely remain around current low levels for longer.

According to BOE figures, the average mortgage interest rate on a two-year fixed-rate mortgage with a loan-to-value of 75% edged down to 1.48% in June. Meanwhile, the average 5-year fixed rate, 75% LTV mortgage interest rate slid further to a fresh record low of 1.99%. 

“With the BOE less likely to raise rates anytime soon, mortgage interest rates should remain at the low, more affordable levels that we’ve become more used to in recent years,” said Best Gapp. “It’s certainly good news for anyone thinking of buying a home, or re-financing their existing mortgage.”

Timely Boost

With so much uncertainty currently weighing heavily on parts of the UK’s housing market, the slowdown in inflation and resultant change in expectations it’s encouraged around the BOE’s interest rate, could provide a well-timed boost.

Of course, there are never any guarantees. However, a stronger likelihood that mortgage rates will remain lower for longer, will be enough to encourage a number of potential home-buyers onto the market, where before they might have been unsure.

Indeed, for UK lender First Direct, the inflation data appeared to be considered very good news. Shortly after the data release, the lender issued a press release stating it had reduced a number of its fixed rate mortgage rates by 0.10 percentage points. 

First Direct is currently offering a 2-year fixed rate 80% LTV mortgage at 1.24%, down from 1.34% previously. It’s 5-year fixed rate 75% LTV mortgage rate, meanwhile, was reduced to 1.84% from 1.94%.

“UK consumers were in line for some good news and they certainly got it in today’s inflation number and subsequent rate view change” said Kube Gold. “If more lenders follow First Direct’s lead, then average rates could had even lower which should stimulate confidence and activity in the UK’s, currently quiet, housing market.”