There may well have been a collective sigh of relief across the mortgage market when the Bank of England announced another Bank Base Rate (BBR) hold at 3.75%, particularly given just how much the inflationary picture has deteriorated since the Monetary Policy Committee (MPC) last met.
On the face of it, it might seem little has changed, with BBR remaining where it has been since December and the MPC again voting 6-3 in favour of maintaining the status quo, with Megan Greene, Catherine Mann and Huw Pill continuing to favour an immediate quarter-point increase.
However, scratch beneath the surface of that unchanged vote and this feels like a rather different decision from the one we saw in August, because if we thought the pressure for an increase was building then, it has seriously ramped up now.
HOLDING WHILE OTHERS HAVE ACTED
There is certainly value in recognising what this hold means, particularly given the Bank has found itself somewhat out of step with other major central banks – notably the ECB and the US Fed – which have recently responded to renewed inflationary pressures by increasing rates.
For UK borrowers, particularly those on tracker, discounted and variable rates, avoiding an increase is therefore a significant positive, although once again we should not confuse an unchanged BBR with an unchanged mortgage market.
The Bank’s own figures show quoted two-year fixed-rate mortgages are now around 95 basis points higher than before the Middle East conflict began, reflecting the substantial tightening in financial conditions which has already taken place through higher swaps and lender funding costs.
Advisers hardly need reminding of this, given the frequency with which lenders have been repricing, sometimes more than once within a single week, and the additional workload created by having to secure products for clients before withdrawal deadlines.
THE SIX MAY NOT BE AS COMFORTABLE AS THEY LOOK
Perhaps the most important part of this decision is therefore not that the vote remained 6-3, but what some of those six are now saying.
Governor, Andrew Bailey’s comments are particularly noteworthy because, while he voted to hold, he acknowledged that risks to energy and food prices are increasingly tilted to the upside and said that, if the Middle East conflict persists and the risk of second-round effects increases, monetary policy may have to tighten.
Clare Lombardelli similarly said the case for raising BBR is building the longer the conflict continues without a lasting resolution, while Dave Ramsden acknowledged there could be a case for an increase if upside inflationary pressures continue to build.
That hardly sounds like six MPC members entirely comfortable with leaving rates where they are indefinitely, and it means the unchanged voting numbers probably disguise a significant shift in the debate.
WAR AND WEATHER REMAIN THE RISKS
The problem continues to be what I have previously described as the ‘two W’s’ of war and weather, because both have the capacity to drive inflation without being particularly responsive to higher UK interest rates.
The Bank says Brent crude was 36% higher than ahead of its July report and UK wholesale gas 78% higher, while around 0.7% of August’s 3.1% inflation rate was directly attributable to higher energy prices, predominantly motor fuel.
It now expects inflation could reach around 3.75% during the final quarter of this year and move slightly above 4% in early 2027, while also highlighting the potential for El Niño and other adverse weather conditions to put further pressure on agricultural and food prices.
The good news is there remains little evidence that these pressures are becoming embedded in wages and wider price-setting, which helps explain why the majority felt able to vote for a hold again, but the longer energy prices remain elevated, the greater that risk becomes.
NOVEMBER COULD BRING FIREWORKS
There is an enormous amount that can change before the MPC next announces its decision on the 5th November of all days, not least because geopolitical developments could alter the energy outlook very quickly.
A meaningful de-escalation in the Middle East could bring some relief to oil and gas prices and change market expectations for UK rates, while continued conflict, elevated energy costs and another increase in inflation could move the argument firmly in the opposite direction.
We also have the ‘small’ matter of a forthcoming Budget and accompanying OBR economic and fiscal forecast on the 28th October, just eight days before the MPC announcement, giving markets another significant event to digest before the Committee makes its decision. Will it be a pre-Halloween ‘frightener’ from the new Chancellor, John Healey, or more treat than trick?
What we do know is that, for advisers and borrower clients, the message remains that waiting for BBR decisions alone is unlikely to be a particularly effective strategy, because swaps and mortgage pricing will continue reacting to developments long before the MPC meets.
With that next decision arriving on the 5th November and, given everything that could happen between now and then, there could be fireworks in more ways than one.
For now, another hold is undoubtedly welcome, but the pressure is building and November’s decision already looks considerably more finely balanced than the unchanged 6-3 vote might suggest.
