Homeowners will face higher mortgage costs as inflation rises and tax policies tighten the economic noose. Experts warn that borrowing rates could rise further, leaving families and businesses to navigate a changing financial landscape.
Homeowners Brace for £500 Mortgage Blow as Rachel Reeves’s Budget Sparks Concern
By Arezki AMIRI
Published on 21 November 2024 13:13
Homeowners are set to pay an additional £500 annually on mortgages as rising inflation and fiscal policies from Rachel Reeves’s Budget drive interest rates higher, according to top economists. Analysts from Pantheon Macroeconomics have projected steady increases in mortgage rates over the next six months, spurred by a record tax raid and additional government borrowing.
Inflation Back Above Target
Recent figures reveal that inflation rose to 2.3% in October, exceeding the Bank of England’s 2% target. The surge comes amid higher energy prices and sustained pressure in services sectors, where costs are climbing at 5% annually. Average wages have also grown by 4.8%, further driving inflation.The government’s fiscal measures, including increased National Insurance contributions and minimum wage hikes, have added to price pressures. These factors are expected to push the Bank of England toward maintaining higher borrowing costs for longer to combat inflation.Mortgage Rates Set to Climb Again
Mortgage rates have already begun to rise since Rachel Reeves announced her Budget, which included significant increases in spending and borrowing. The typical two-year fixed rate for borrowers with a 25% deposit fell from 5.19% in June to 4.41% in November but is projected to climb back to 4.8% within six months.This increase would cost the average homeowner an additional £40 per month or £500 annually, according to UK Finance.Robert Wood of Pantheon explained, “Markets expect the Bank of England to cut interest rates slower than they did a couple of months ago. That reflects the extra borrowing in the Budget, the risk from Donald Trump’s potential tariff hikes and tax cuts, and continued stubborn services [inflation] and wage growth in the UK.”Economic Squeeze Puts Starmer’s Mortgage Pledge Under Pressure
The rise in borrowing costs challenges Prime Minister Keir Starmer’s pledge to maintain low mortgage rates. In October, Starmer assured voters that there would be no return to economic instability, saying in the Daily Mirror: “There will be no return to the chaos that sent mortgages soaring when the Tories let borrowing get out of control.”However, financial markets have seen two-year swap rates rise by over half a percentage point in recent months, reflecting expectations of prolonged higher interest rates.Retailers and Businesses Brace for Costs
Retailers have warned that the Chancellor’s tax policies, including National Insurance increases and higher minimum wages, will likely result in businesses raising prices. The Bank of England has highlighted these risks, noting that companies face a choice between absorbing these costs through lower profits or passing them on to consumers.Andrew Bailey, the Bank’s Governor, stated this week that the Monetary Policy Committee (MPC) would take a cautious approach to rate cuts given these uncertainties.“There are different ways in which the increase in employer National Insurance contributions announced in the autumn Budget could play out in the economy,” Bailey told MPs on the Treasury Select Committee.Why Interest Rate Cuts Will Be Slow?
The Bank of England has cut its base rate twice this year, but further reductions are unlikely to come quickly. Andrew Wishart of Berenberg Bank anticipates that sticky inflation, driven by wage growth and rising minimum wages, will prevent rates from dropping below 4.25% in 2024.Factors influencing this cautious approach include:- Minimum wage rise: A 6.7% increase in April will contribute to further wage-driven inflation.
- Global uncertainties: Higher shipping costs and potential US tariffs add external price pressures.