Brits brace for higher mortgage payments despite Bank of England seen cutting rates

• Britons are facing the prospect of higher mortgages for longer even as the Bank of England readies to cut rates on Thursday.
• Finance Minister Rachel Reeves' tax-and-spend budget shook markets last week, with analysts now expecting an increase to near-term growth and inflation.
• "It's confusing times for mortgage borrowers when expectation is for a base rate cut ... but fixed rates look set to rise," David Hollingworth, associate director at L&C Mortgages, said.

LONDON — Britons are facing the prospect of higher mortgage rates for longer after the government's tax-and-spend budget threw off expectations for a series of near-term interest rate cuts.

The Bank of England is widely expected to cut rates on Thursday, in the second such trim this year. But forecasts for a more dovish stance thereafter look shaky, following Finance Minister Rachel Reeves' announcement last week of £40 billion ($51.41 billion) in tax hikes and a change to the U.K.'s debt rule.

U.K. borrowing costs spiked on Thursday as investors pondered the extent of Reeves' excess borrowing and the secondary effects of tax rises on growth and inflation. Gilts yields have since continued to hover higher, with the 10-year yield — which moves inversely to prices — last seen at 4.508% on Wednesday.

Mortgage rates also took a hit from the uncertainty, with a number of smaller and mainstream lenders raising mortgage rates on the expectation that interest rates may stay higher for longer. That comes despite a gradual decline in home borrowing costs following the BOE's initial rate cut in August — its first in over four years.

"It's confusing times for mortgage borrowers when expectation is for a base rate cut ... but fixed rates look set to rise," David Hollingworth, associate director at broker L&C Mortgages, said in a statement Friday.

Virgin Money became the first major lender to raise mortgage rates after the budget, lifting them by 0.15%. Some banks diverged on their outlook, however, with Santander reducing rates by 0.36%. The average five-year fixed mortgage rate is now 4.64%, down from 5.36% last year, while the average two-year fixed rate is 4.91%, down from 5.81% over the same period in 2023, data from property portal Rightmove showed Thursday.

"This isn't the radical spike in rates that have blighted mortgage rates in the last couple of years. But if funding costs don't ease, the sub 4% 5-year fixed rates that we've become used to in recent months could be under threat," Hollingworth continued, noting that more lenders might reconsider their rates going forward.

Later but further

Reeves' fiscal reset comes at a perceived inflection point for the Bank of England, which has until now taken a more hawkish approach to monetary easing than some other major central banks.

Economists upped expectations for a faster pace of rate cuts last month following a sharp drop in inflation to 1.7% and an easing of wage growth. However, post-budget forecasts cast doubt on that view, with the government-funded but politically neutral Office for Budget Responsibility saying near-term economic growth and inflation now look set to remain higher.

J.P. Morgan's U.K. economist Allan Monks said in a note Monday that BOE policymakers are now likely to stick with their previously signaled "gradual approach" to rate cuts. He added that interest rates could now remain 50-basis-points higher than previously expected at the end of the cutting cycle.

As of Wednesday, markets are pricing in a 97% chance of a 25 basis point cut on Nov. 7, bringing the bank's key rate to 4.75%.

Analysts agreed that a Thursday cut remains in the cards, but they indicated that the bank was likely to take a more cautious approach thereafter.

"Prospects for stronger 2025 growth are likely to reduce the urgency for sequential cuts in the near term," Goldman Sachs said in a note last Thursday. Goldman now sees the BOE holding rates steady in December, before cutting sequentially from February to bring the bank rate to 3% in November.

Citi on Tuesday echoed expectations for a December hold, citing "greater fiscal activism" from the government as a reason for caution. It nevertheless added that a more "aggressive" approach could be expected once Reeves' plans bed in, forecasting consecutive cuts from May without specifying a number of reductions.

"With fiscal policy in our view set up to be a 'one shot' game, a guarded approach in the near-term still implies a more aggressive cutting cycle later on. Later, but further, remains the ultimate direction of travel," analysts wrote in a note.