The Bank of England has held interest rates at 3.75% yesterday but Governor Andrew Bailey has warned that the case for an increase is building as higher energy prices threaten to keep inflation elevated.
The Monetary Policy Committee (MPC) voted by six to three to leave Bank Rate unchanged, with three members backing an immediate quarter-point increase to 4%. The split was unchanged from July.
The decision avoids an immediate increase in borrowing costs for homebuyers on variable rates, but uncertainty over the future path of rates continues to hang over the housing market.
UK inflation increased to 3.1% in August and the Bank now estimates that it could rise to slightly above 4% in early 2027 if current energy-price pressures persist.
RATE RISE RISK
The Bank says the risks to inflation have moved further to the upside since its July assessment, with the continuing Middle East conflict pushing crude oil and other energy prices higher.
Bailey says there is still limited evidence that the energy shock is feeding through into wider price and wage setting, allowing the Bank to wait for further evidence.
But he warns: “The case for raising Bank Rate is building the longer the conflict continues without lasting resolution.”
Three MPC members – Megan Greene, Catherine Mann and Huw Pill – already believe the Bank should act, voting to increase rates to 4% at this week’s meeting.
The Bank’s next decision is due on 5 November.
HOUSING MARKET
One City insider told Property Soup the decision gave the Bank more time to assess the impact of the Middle East conflict, energy prices and inflation, with softer housing activity and weak growth providing arguments for caution.
They added: “Andrew Bailey made clear that further rate rises remain on the table if the conflict drags on and higher energy prices keep inflation elevated.”
They also pointed out that the next MPC meeting will also come just days after the Budget on 28 October, adding another source of uncertainty for the property market.
Mortgage pricing can move ahead of Bank Rate as lenders respond to changes in swap rates and expectations for future monetary policy.
Financial markets have already undergone a sharp reassessment of the interest-rate outlook, with investors now contemplating further UK tightening after previously expecting rates to fall.
That changing backdrop could continue to put pressure on buyer affordability even while Bank Rate itself remains unchanged.
The US Federal Reserve has also raised its benchmark rate by 0.25 percentage points to 3.75%–4%, its first increase in more than three years, as central banks respond to renewed global inflation pressures.
WELCOME NEWS
Matt Smith (mai picture, inset), Rightmove’s mortgage expert says: “The Bank of England’s decision to hold the base rate will come as welcome news to mortgage borrowers, particularly those on tracker mortgages whose monthly repayments move in line with changes to the base rate. However, today’s decision is unlikely to remove all uncertainty for home-movers.
“Mortgage pricing is influenced by a range of factors beyond the Bank Rate alone. Fixed-rate deals tend to reflect market expectations in advance recent increases in the underlying cost of funding these products mean that lenders will continue to adjust mortgage rates.
“Financial markets are still pricing in the possibility of further base rate increases in the months ahead, which means borrowers shouldn’t necessarily view today’s decision as a signal that mortgage rates have reached their peak.”
