Bank of England keeps rates at 5.25% – consumer credit industry reaction

The Bank of England has announced that it has kept interest rates at 5.25%. The MPC voted 6-3 to hold rates steady, with two dissenters preferring an increase in rates to 5.5% and one preferring a cut to 5%

The Resolution Foundation that the Bank of England’s latest economic outlook will bring relief to consumers and mortgagors, as forecasts for inflation and interest rates have been revised down, but not so for workers as pay growth has also been revised down – by £400 a year by 2026..

The Bank held interest rates at 5.25 per cent, but hinted that rate cuts could start earlier than previously expected. The confirmation that rates have peaked and will start falling will bring relief to those having to remortgage this year. While their annual mortgage costs are still set to rise by around £1,800 on average, this is considerably less than the £3,000 rise they faced last summer when market expectations for interest rates peaked.

The revised outlook for inflation – in which it is now projected to return to its 2 per cent target in May 2024, rather than Q4 2025 – will bring widespread relief that the UK’s painful two-year battle with high inflation is finally coming to an end.

However, with falling inflation driven in part by falling wage pressure – the Bank has also revised down its forecast for private-sector nominal wage growth by 1.2 percentage points in Q1 2024 – workers are unlikely to see the fruits of falling inflation in their pay packets. The Bank has also revised down its medium-term forecast for real wages for 1.5 per cent – or £400 a year – by 2026.

James Smith, Research Director at the Resolution Foundation, said “Today the Bank signalled that it now expects inflation to return to the 2 per cent target in May, rather than late in 2025, that interest rates have peaked, and hinted that rates could start falling sooner than previously expected.

“This will bring good news for those 1.5 million people having to remortgage this year, who will see smaller cost rises than they might have feared, while lower prices will be a relief to everyone.

“But there is a sting in the tail for workers. With lower price pressures partly being driven by lower wage growth, workers are unlikely to see the fruits to lower inflation in their pay packets. In fact, real wages are forecast to £400 a year lower by 2026. The route to stronger wage growth will instead have to come from the hard yards of higher productivity.”

Sarah Coles, Head of Personal Finance at  Hargreaves Lansdown said “We had seen rapid falls in mortgage rates from the peak in August. However, as a result of the rejig of expectations, those have slowed significantly, and have barely moved over the past week. The path is still downhill, and we expect cuts to keep coming, but lenders are pausing for breath. It means anyone holding out for significant falls before they buy may have a longer wait than they were expecting. For those with a looming remortgage, it means they may have a bigger mountain to climb in affording their new deal. 

It makes shopping around even more vital, but if this isn’t enough to make a remortgage affordable, it’s worth talking to your lender, who may be able to offer an extension to the length of the loan, a temporary switch to interest-only or even taking a payment holiday. Some of these will have an impact on your credit record, but will do far less damage than missing payments.”

John Phillips, CEO of Spicerhaart and Just Mortgages said: “Even before the recent surprise news on inflation, my expectation was the Bank of England would sit on the base rate once again – even though it should cut. While there’s no doubt the bank has much to consider, the danger is it takes too long to make a decision and it eventually comes too late.

“Nevertheless, continuity and stability is a positive, especially for those not on a fixed rate deal. While it’s not here yet, a potential cut to base rate on the horizon is certainly helping bring some confidence back to the market, along with continued competition among lenders with rates coming down. We’ve seen this first hand in both our new buyer registrations and in requests for valuations, which are both at their highest point for a number of months.

“With affordability remaining a real stumbling block for many borrowers, it would be fantastic to get to a position where the base rate is improving, lenders are continuing to innovate, and the government is bringing some much-needed support to the housing market. Given recent news and speculation, this may become a reality in the not-too-distant future. Meanwhile, our message to our brokers is to keep supporting clients, stay visible and proactive, and keep highlighting the value of advice – especially as borrowers try to navigate the market.”

Simon Webb, Managing Director of capital markets and finance at LiveMore said “Holding the base rate at 5.25% is good news for people with savings, who will benefit from the higher interest rates. Depending on what inflation does, we are unlikely to see a cut in the base rate before the summer, when lenders will adjust their interest rates and savers will get less bang for their buck.

“It’s not great news, however, for people on SVRs who were hoping for a drop in interest rates. It’s particularly tough on older generations and mortgage prisoners struggling to meet their mortgage payments.”