The Bank of England’s decision to maintain Bank Base Rate (BBR) last month at 3.75% provides another period of stability for the mortgage market, but the latest vote suggests the Monetary Policy Committee (MPC) is becoming increasingly divided over how long that position can be maintained.
BBR has now remained unchanged since the last quarter point cut in December last year, yet the latest 6-3 vote in favour of holding represents a slight, but notable, shift from the 7-2 majority recorded at the previous meeting.
MPC members, Megan Greene and Huw Pill, were again in favour of an immediate quarter-point increase, and were joined by Catherine Mann. While six members still believe holding rates is the appropriate course, the growing minority in favour of tightening suggests the pressure within the Committee are increasing.
THE CASE FOR A RISE IS GAINING SUPPORT
The change in the vote split is important because it shows the debate is becoming more finely balanced. Last month inflation fell to 2.6%, which provides the majority of MPC members with some justification for keeping BBR unchanged.
However, policymakers remain concerned about what happens next, particularly with higher and more volatile energy prices expected to place renewed upward pressure on inflation over the coming months.
For Greene, Mann and Pill, those risks appear sufficient to justify acting now rather than waiting for clearer evidence that inflation is becoming more persistent. Their concern is if higher energy costs begin feeding into wage demands and business pricing decisions, the Committee could ultimately be forced into a more aggressive response later.
The majority clearly do not believe that point has been reached. For now, six members appear more comfortable that existing monetary policy and tighter wider financial conditions are doing enough to contain inflationary pressure.
THE ECONOMY REMAINS PART OF THE BALANCING ACT
Alongside inflation, the MPC continues to face an economy which offers plenty of reasons for caution. Domestic demand remains relatively weak, the labour market has loosened and there are still questions around the strength of economic growth.
Raising BBR in those circumstances would add further pressure to households and businesses already dealing with elevated borrowing costs.
That is ultimately the difficult balance facing the Committee. Acting too soon risks putting unnecessary strain on an already subdued economy, however there is also an argument that waiting too long increases the possibility that another bout of inflation becomes more firmly embedded.
The 6-3 vote suggests the majority still believe the greater risk lies in tightening prematurely and I would have to agree with this course of action.
That said, if inflation rises over the coming months, or there is clearer evidence of second-round effects beginning to develop, the case being made by the three dissenting members could attract further support.
THE MORTGAGE MARKET IS ALREADY MOVING
For advisers and borrowers, however, another BBR hold should not be interpreted as meaning mortgage pricing itself will remain unchanged.
One of the clearest lessons from recent months is that fixed mortgage rates can move well ahead of official Bank Rate decisions. Swap rates, lender funding costs, inflation expectations and geopolitical developments all affect pricing before the MPC makes any formal change.
We have already seen lenders respond quickly to changing market conditions, with mortgage pricing moving in both directions despite BBR remaining at 3.75%.
This means borrowers approaching the end of an existing deal, or those considering a purchase, should be cautious about simply waiting for the next MPC meeting in the hope that rates will improve.
The September decision may ultimately deliver another hold, or the balance within the Committee could shift further towards an increase. Either way, mortgage pricing will continue reacting to developments between now and then.
CERTAINTY STILL HAS VALUE
There is therefore still value in the stability provided by another BBR hold, particularly after a prolonged period of economic and market uncertainty.
However, this feels a little less comfortable than previous decisions. The MPC may have maintained the status quo, but three members now believe an increase is necessary and that should serve as a reminder that the direction of travel is far from guaranteed.
For advisers, this makes early conversations with clients increasingly important. Borrowers should understand the options available to them now rather than basing decisions on an assumption that mortgage pricing will inevitably improve.
There may well be opportunities if inflation continues to ease and financial markets become more settled, but equally there is a risk renewed inflationary pressure pushes expectations and funding costs higher.
The latest MPC decision therefore provides stability, but it also comes with a warning. BBR remains at 3.75% for now, yet the debate over what happens next is clearly becoming much more finely balanced.
