Why your clients should look at fixing now
The European Central Bank (ECB) is expected to raise interest rates for the first time since September 2023 when its Governing Council meets next Thursday, after Eurostat data published this morning showed euro-area inflation accelerating to 3.2% in May. Core inflation rose more than anticipated to 2.5%, while the closely watched services gauge jumped to 3.5% — a signal to ECB policymakers that domestically generated price pressure is now entrenched enough to act on.
The ECB's deposit rate currently stands at 2%. A 25 basis-point hike on 11 June would take it to 2.25%.
The UK sets its own rates. But the notion that an ECB decision is someone else's problem does not survive scrutiny for brokers advising clients in the current market.
How it reaches UK mortgages
The transmission runs through two channels that are already under pressure.
Sterling and import costs. When the ECB raises rates, capital flows toward higher-yielding euro assets, typically weakening the pound. A softer sterling raises the cost of goods imported from the EU — the UK's largest trading partner — adding to an inflation picture that is already uncomfortable. UK CPI stood at 3.3% in March before easing to 2.8% in April. Any ECB-driven exchange rate move puts upward pressure on those readings.
Gilt yields and swap rates. UK fixed-rate mortgages are priced off sterling swap rates, not the base rate directly. Swap rates move with gilt yields, and gilt yields respond to European sovereign bond markets. When the ECB tightens, European yields rise, reducing appetite for lower-yielding gilts and pushing UK funding costs higher — even before the Bank of England has done anything. This is precisely the mechanism that drove the disappearance of sub-4% fixed-rate deals from all major lenders earlier this year: rising swap rates driven by global pressures, not domestic policy.
The Bank of England meeting one week later
The MPC meets on 18 June — seven days after the ECB. It held rates at 3.75% on 30 April with an eight-to-one vote, the single dissent being for a rise to 4%. Governor Andrew Bailey has said higher inflation is "unavoidable." A majority of brokers surveyed by Mortgage Introducer in March already expected one or two Bank of England rate hikes in 2026 — and that survey predated this morning's ECB data.
A Bank of England hike on 18 June remains unlikely as the consensus call, but it is no longer a remote possibility. Gilt yields are already at multi-decade highs, and a confirmed ECB tightening next week will do nothing to bring them lower.
Three things to tell clients this week
Clients with expiring fixed deals should act, not wait. The effective rate on newly drawn mortgages rose to 4.08% in April's Bank of England data — up from 4.03% in March — before any ECB action. If next week's hike moves swap rates higher, today's products may not be available in a fortnight at the same price.
Tracker mortgages carry more risk than they did. They look attractive against current fixed rates, but base rate is now as likely to rise as to fall. As Moneyfacts' Rachel Springall has noted, any tracker product without an early repayment charge is worth considering — but clients should go in with eyes open.
Purchase clients should be moving. April purchase approvals hit 65,900 — the strongest since before the 2022 mini-Budget — confirming that demand is real and rising. The rate available today may well be the best available for some time. Brokers waiting for better conditions to materialise are waiting against the tide of every data point published this morning.
