Will mortgage rates go down in 2023? Brokers explain how UK inflation falling to 2.9% will affect repayments
When Chancellor Jeremy Hunt announced on Wednesday that the Office for Budget Responsibility (OBR) had forecast that inflation would fall from 10.7 per cent in the final quarter of last year to 2.9 per cent by the end of this year, eyebrows shot up.
Dean Esnard, director at Magni Finance, was in no doubt about the significance of the news.
“The expectation that inflation will fall to 2.9 per cent by the end of the year is the most important information from the Budget,” Esnard said.
He added: “This will undoubtedly give the Bank of England confidence that the base rate increases have worked and hopefully the end is in sight. All eyes will now be on the Monetary Policy Committee meeting next Thursday where we will really find out where we stand.”
A welcome fall in inflation wouldn’t just be good in itself but could also be likely to mean that the Bank of England’s Monetary Policy Committee holds off using the lever of interest rates to tame the rate of growth in price rises.
A break in the steady pace of rate hikes would also be welcome to the nation’s mortgage borrowers. But not everyone is so optimistic about the future. Some market analysts think inflation more baked-in than the OBR assumes.
Andrew Montlake, spokesperson for Coreco mortgage brokers, said it was important not to get carried away with the thought that inflation might be falling more than expected.
“If you look around the globe, the economy is stronger than expected so potentially it might not fall as the government has suggested,” Mr Montlake said.
He added: “Even if it does there is no indication that the Bank of England wants to see the base rate fall dramatically. and if you think 4 per cent is the long term average you might see rates fall a bit but not dramatically. I think mortgage rates around 3.5 per cent – 4 per cent in is the best we can hope for in the short term.”
Luckily we don’t just have to make do with informed speculation. There is a tool available which gives a fairly accurate forecast of the direction of interest rate travel and that is the Sterling Overnight Index Average (Sonia).
Sonia is an interest rate benchmark based on transactions and reflects the average interest banks will pay to borrow sterling overnight from other financial institutions.
Mike Perrin, director at Private Finance said: “At the moment, the one year cost of borrowing is currently 4.1 per cent and the base rate is 4 per cent. This suggests that it’s currently it’s 50-50 whether there’ll be another rise in the base rate.”.
But after a year, Sonia swap rates are predicted to fall – to 3.9 per cent over two years, 3.8 per cent three years and 3.5 per cent over five years.
Mr Perrin said: “This suggests that the money markets expect the base rate will fall after the next 12 months or so. But there can always be bumps in the road, such as Credit Suisse and Silicon Valley Bank which together increased borrowing costs this week. Hopefully we’re over the worst of it. Certainly rates have risen far higher and faster than was initially expected as a result of the disastrous September mini budget.”
