When will mortgage rates go down? What experts predict for 2024 after inflation announcement

Inflation stayed flat at 6.7 per cent in the year to September, official figures released by the Office for National Statistics (ONS) show.

Economists had predicted a slight fall, but higher petrol costs and the price of hotel stays resulted in the rate staying put, the ONS said.

All eyes will now be on the Bank of England’s interest rates decision next month.

The Bank’s Monetary Policy Committee (MPC) will update the base rate on Thursday 2 November, after holding them steady at 5.25 per cent in September. It was the first time since November 2021 that it hadn’t upped rates, following a record 14 consecutive increases.

It’s decision will have an effect on mortgages, which have been dropping recently despite stubbornly high inflation. Here’s what to expect.

What will happen to interest rates?

Inflation is one of the main factors that influences whether the Bank of England chooses to raise or lower the base interest rate.

The base rate determines the interest rate the Bank of England pays to commercial banks that hold money with it. It also influences the rates those banks charge people to borrow money or pay on their savings.

The Bank generally raises rates to combat inflation. The logic is that if borrowing is more expensive, then people have less money to spend, and so there is less demand for goods and services.

This is why is has been raising rates so consistently over the past two years, as it attempts to bring inflation back towards its eventual 2 per cent target, down from a high of 11.1 per cent in October 2022.

Earlier this year, when inflation sat above 10 per cent, Rishi Sunak pledged to halve it by the end of 2023, meaning it would sit at just above 5 per cent by December.

Some forecasters have suggested that, with inflation remaining at 6.7 per cent, the MPC is likely to keep interest rates at 5.25 per cent in November.

However, economists have also cautioned that an escalating situation in the Middle East could have an impact on inflation because of the effect on oil prices, which would cause a huge dilemma for Andrew Bailey, its governor, and the Bank’s economists – but this is not a significant problem yet.

Although Israel is not an oil producer, the region is a key player to global supplies and there are suggestions that if Iran – which has a history of support for Hamas – were to become more embroiled in the conflict, then global prices of the commodity could increase.

Edward Jones, economics professor at Bangor University, said that although the battle with inflation was not over, a small downwards movement in core inflation – which is a good predictor of the future path of inflation and strips out energy and food prices – from 6.2 to 6.1 per cent was good news.

“If I had to bet, I’d suspect they’ll keep rates where they are for now, though things can change quickly. For now, inflation in Europe is not hugely affected by what is going on in the Middle East, but if it escalates and has an impact on oil costs, then the Bank of England has a tough decision to make,” he said.

Andrew Sentance, a former MPC member and now senior adviser at Cambridge Econometrics, said he expected the MPC to vote for a hold in November.

“I think the latest inflation numbers won’t sway those who voted for a rate hold. I think they will see the pause in falling inflation as temporary,” he said.

“Indeed, Sarah Breeden will join the MPC in place of Sir Jon Cunliffe in November and Sir John was one of the dissenting hawks in September. Breeden is more likely to vote with the Governor and the others who want to hold rates. That would take the hold vote to 6-3.”

Michael Saunders, a former MPC member and now adviser at Oxford Economics, said: “I expect them to hold rates in November, based on the data so far. The economy is flat, employment is flat or falling slightly, most guides indicate that pay growth is slowing and interest rates already are at a restrictive level.”

Some economists have said they think the Bank of England will narrowly vote to up rates, however. Willem Buiter, another ex-MPC member, said he believed a 5-4 vote in favor of a 0.25 percentage rise is the most likely outcome “because annual average regular pay growth shows few signs of coming down”.

How will mortgage rates be affected?

Mortgage rates could fall to as low as 4.5 per cent this year as prices continue to drop, despite inflation remaining high, experts have said.

Mortgages are not directly influenced by inflation, although many products are affected by the base rate.

A small “rate war” is taking place between lenders to attract business, after a slow property market in the first part of this year meant many were behind target for deals secured.

Nick Mendes, a broker at John Charcol, told i: “We’ve seen recently lenders with five-year fixes below the 5 per cent barrier and three years also going below 5 per cent, which is really positive.

“My hunch is that we will see more 4.6 per cent rates by the end of October. If we don’t see a base rate rise in November then we will be in the midst of seeing rates as low as 4.5 per cent.”

Aaron Strutt, of brokers Trinity Financial, said: “There is a reasonable chance we will see five-year fixes priced at 4.5 per cent over the next few months. Bank and building societies will be pushing to get more business, especially as we get closer to Christmas, and more than 10 lenders offer sub-5 per cent two, three and five-year fixes now.”

Several lenders are already offering deals below 5 per cent.

Halifax’s latest fixed-rate reduction shows a five-year fixed deal is now available for 4.73 per cent, while Nationwide also offers a five-year deal for 4.74 per cent.

The Co-Operative Bank has also cut its five-year rates to 4.86 per cent for customers with loans of £650,000 or higher.

Prices have been able to come down as swap rates, which underpin the pricing of fixed-rate mortgages, have remained settled over the past few weeks. However, they have risen on the back of the latest inflation data.

Five-year swaps rose to 4.68 per cent on Wednesday from 4.57 per cent the day prior. Similarly, two-year swaps are now up to 5.18 per cent, an increase from 5.11 per cent.

This may have an impact on how much lenders can reduce rates, but experts say this is likely to be initial market reaction.