Annual CPI rise puts pressure on borrowers as the Monetary Policy Committee prepares to vote on Thursday
UK inflation accelerated to 3.1% in August, the Office for National Statistics (ONS) said on Wednesday, piling pressure on the Bank of England's Monetary Policy Committee (MPC) ahead of its base rate decision tomorrow.
The Consumer Prices Index (CPI) annual rate rose from 2.9% in July, pushing further above the Bank's 2% target and prompting warnings from industry figures that mortgage borrowing costs are set to remain under sustained upward pressure.
The data arrives with markets already unsettled. Major lenders have raised mortgage rates twice this month, swap rates have climbed sharply, and borrowers rolling off fixed deals are bracing for significantly higher repayments. The Bank of England currently holds the base rate at 3.75%, having held it at that level for five consecutive meetings since December, and tomorrow's decision now looks considerably less clear-cut than it did even weeks ago.
Lenders move before the MPC does
Rob Clifford, chief executive of Stonebridge mortgage and protection network, said the August reading confirmed what lenders had already priced in.
"Major lenders have hiked rates twice this month already and the inflation reading simply confirms what they already knew. Nothing can be taken for granted and September has been a good illustration of that. Advisers need to move fast no matter what the Bank of England does. A rate hold won't affect medium-term inflation fears and it's these which are driving borrowing costs up. There's no guarantee lenders won't be forced to act again soon."
Clifford drew particular attention to clients rolling off five-year fixed deals taken out in mid-2021, when rates were still priced well under 3%.
"These remortgagers face a steep jump in repayments so it's up to advisers to protect them against interest rate fluctuations as much as they can. Reserving rates with an early application is risk-free insurance against further hikes in borrowing costs. Yet it still amazes us how many borrowers resist doing this because they're convinced rates will come back down. This is where qualified advice is worth its weight in gold and it's an opportunity for advisers to show clients how they make their experience count."
Markets price in further tightening
Emma Hollingworth, chief distribution officer at LSL Financial Services, said the August data had materially shifted the odds on the MPC's next move, even if a hold remained the most likely outcome for Thursday.
"While the Bank of England has held its nerve on interest rates since the US-Iran conflict flared up again, today's inflation data has significantly raised the odds that it will hike borrowing costs this year. The European Central Bank increased rates last week, albeit from a lower base, and markets expect the US Federal Reserve to follow suit later today. That piles the pressure on the Bank's Monetary Policy Committee to act sooner rather than later."
She added that fears of renewed inflation had already driven market pricing toward as many as four rate rises over the next year, sending swap rates higher and triggering a wave of lender repricing.
"Whatever the outcome, borrowers are already feeling the squeeze. The outlook for borrowers remains highly uncertain and it's in moments like these that advisers prove their worth. Brokers should reach out now to clients nearing the end of their deal to help them navigate what are once again increasingly choppy waters."
Fixed rates under pressure as swap rates climb
David Hollingworth, associate director at L&C Mortgages, said the rise had been anticipated by the market but that would not shield households from the consequences.
"The rate of inflation was expected to rise in August, so on the face of it these figures will have been anticipated by the market. That won't stop the increase putting more pressure on households and furthering expectation that interest rates will need to head higher. That's a far cry from the forecast at the beginning of the year, when borrowers were looking forward to further cuts in interest rates over the course of the year."
Hollingworth said markets had grown increasingly sensitive to signs of stubborn inflation, particularly given ongoing geopolitical uncertainty and the impact of higher fuel and energy prices on household costs. That sensitivity had fed directly into fixed mortgage pricing as swap rates climbed.
"The latest round of volatility is sending fixed mortgage rates higher, with a growing number of lenders increasing their fixed rates as funding costs have shot up. As lenders respond to rising swap rates, it's translating into higher costs for those looking to buy a home or remortgage. Jittery markets could mean further tremors for mortgage rates, and several lenders are already hiking rates for the second time in as many weeks. As things stand, borrowers should expect mortgage rates to remain under upward pressure in the near term. Anyone approaching the end of a fixed rate should review their options sooner rather than later. Recent weeks have been a reminder of just how quickly mortgage pricing can change when market sentiment shifts."
Mark Harris, chief executive of mortgage broker SPF Private Clients, said the figures made further MPC action look increasingly likely, though the timing remained uncertain. He said the Bank might choose to hold on Thursday and wait until November – potentially coinciding with chancellor John Healey's first Budget – before moving.
"With the consumer prices index rising above 3% in August, well ahead of the Bank's 2% target, the chance of an interest rate rise – and more – looks increasingly likely. However, the Bank might pause a little longer until the November meeting, resulting in higher borrowing costs soon after chancellor Healey's first Budget."
Harris named HSBC, Nationwide, Santander and Halifax among the lenders that had already raised rates, and said others were expected to follow as borrowers searched for the most competitive deals. He urged clients to act now rather than wait for conditions to improve.
"Speak to a whole-of-market broker and don't delay – lock into a new product now. If rates fall by the time you come to take out the mortgage, you should be able to switch to a cheaper deal at that time but if rates rise, you will be pleased you acted when you did."
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