Bank of England rate rising – so why are lenders still cutting interest rates?

"Lenders are fighting for new business"

Bank of England rate rising – so why are lenders still cutting interest rates?

The country witnessed its 10th consecutive increase to the Bank of England base rate earlier this month, however lenders have continued to reduce their interest rates.

This has left many wondering why, with one expert pointing toward improving market stability and competition among lenders.

Bank of England rate rises – so why are interest rates falling?

Due to the current decline in mortgage approvals, Karen Noye (pictured left), mortgage expert at Quilter, said lenders have been left fighting for new business and to retain their existing clients. She said that this has contributed to why, despite the Bank of England’s recent announcement it would be increasing the base rate yet again, lenders have continued to reduce rates.

This is contrast to the aftermath of the mini budget, when the market witnessed fixed rates rise significantly in relation to the base rate.

“At the time, most lenders priced in much higher future interest rate rises, but now the outlook is more stable, mortgage rates have reduced, and the recent base rate increases have already been factored in,” Noye said.

Samuel Mather-Holgate (pictured right), director of Mather & Murray Financial, said it needs to be pointed out that lenders are reducing five-year fixed rate products, not two-year deals.

“Lenders know that over the medium term, rates will need to come down as the economy weakens and inflation falls away,” he said.

Bank of England – base rate

Mather-Holgate said the Bank of England is still signalling a further rate rise, which he said is likely to be in March, although it could occur in April.

“While most economists predict a further hike of 0.5%, I would hope it is only half of this, with a terminal rate of 4.25%,” he said.

Mather-Holgate added that the central bank will likely hold rates higher than necessary, so he would expect them to not start coming down until the end of summer - but he believes they will come down fast.

“It would not surprise me if we were back at 3% by the end of the year; when the bank starts slashing rates, confidence will return to the market,” Mather-Holgate said.

Bank of England – borrowers

Noye said that given there have been so many headlines on mortgage rates reducing this year, she believes there may be a spike in interest in tracker rates, where borrowers have the budget and affordability to ride out further increases.

“However, with fixed rates now starting to come in under 4%, below the current base rate, borrowers may choose to fix so any further base rate increase does not impact their monthly payments,” she said.

Still, Noye believes it is worth noting that the lowest level fixed rates are only available to those with sizeable deposits or high levels of equity, so not everyone will be able to benefit.

Declining mortgage rates, coupled with lower house prices, Noye said, could well entice people who may have previously put their plans on hold with regards to moving or buying their first home to reconsider their options.

Bank of England – looking to the future

Mather-Holgate believes that by the time the central bank has started to slash rates, house prices will have bottomed out and there will be bargains to be had.

Following the normal economic cycle, the worst of the news will have already come out, and Mather-Holgate believes we should start seeing growing employment and increasing GDP in the latter half of 2023.

“There is a lot to happen between now and the last days of summer, however, and politicians can always throw in a spanner or two,” he said.

Why do you believe lenders are continuing to reduce rates despite the base rate climbing? Let us know in the comments below.