By James Sillars, business and economics reporter
Around half the UK’s mortgage holders face paying higher rates over the next three years, the Bank of England has warned as its battle against inflation continues to drag on longer than hoped.
Its latest financial stability report – released twice a year – showed 4.4 million homes were set to refinance on to higher rates.
But it added that around a quarter of borrowers were expected to benefit from lower rates, based on current market pricing, as rates have dropped from the highs seen in 2023.
The central bank’s financial policy committee also saw a risk ahead – without directly referring to Donald Trump’s warning around raised US trade tariffs when he takes office – that higher trade barriers could hit global growth.
It said such barriers would feed uncertainty about inflation, potentially causing volatility in financial markets.
“A reduction in the degree of international policy cooperation could hinder progress by authorities in improving the resilience of the financial system and its ability to absorb future shocks,” the report said.
When it came to the UK specifically, the Bank said that its latest stress tests of the UK banking system had raised no concerns.
The report was released against a backdrop of weak expectations for a third interest rate cut this year when the Bank’s rate-setting committee meets in a few weeks’ time.
Just 13% of financial market participants expect a reduction to 4.5% on 19 December.
That is because all the data the Bank’s relies on, to judge whether a cut to borrowing costs is appropriate, contains red flags.
The headline measure of inflation is back above the monetary policy committee’s 2% target at 2.3% following a sharp leap from 1.7% in October due to rising energy costs.
Some other stubborn elements include prices for services.
Another stumbling block has come from the pace of wage growth, which the Bank fears will stoke demand in the economy, and therefore price growth as a result.
There have been no dissenters on the future path for rates, if recent remarks by Bank rate-setters are anything to go by.
All have spoken of the need for a “gradual” approach.
That does not bode well for millions of new borrowers – and those whose loans are tied to Bank rate – though deals for things like fixed rate mortgages have eased in line with the two interest rate cuts announced by the Bank to date in 2024.
Separate figures released earlier in the morning by the Bank suggested confidence remained that borrowing costs were on a downward path, however, as mortgage approvals and lending rose in October.
The number of mortgages approved was at its highest level since August 2022, the data showed.
However, a slight drop in demand for consumer credit and higher savings rates also suggested continued caution over the slowing economic outlook.
It is further evidence of caution among households in the run-up to the budget, which, the government had warned, would be “tough”.
Bank of England governor Andrew Bailey is holding a news conference on the findings from 11am – watch live in the stream at the top of this live page.
