With the Bank of England set to decide whether to increase the cost of borrowing further on the 21st of September, insight from Hargreaves Lansdown has noted a cooling economy ahead of the major decision.
Despite the fact that the market now expects a further two more rate hikes to 5.75% before the end of the year, Susannah Streeter, head of money and markets at Hargreaves Lansdown notes that the central bank’s interest rate hiking strategy seems to be working.
She said: ‘’It’s still four weeks until Bank of England policymakers decide on whether to increase the cost of borrowing again and the economy is already cooling fast.
“The interest rate medicine is working but with unfortunate side effects of a sharp drop in economic activity, and expectations are rising that mild recession is on the way.
“There’s been a lag between the rapid hikes in rates and the impact on the business landscape but now the outlook is deteriorating fast.”
She continued: “Forecasts can change very quickly and interest rate expectations may well be revised lower again if fresh data on the jobs market points to a further rise in unemployment and recruiters indicate employers are becoming even more cautious about hiring staff.
“Already the Bank of England has warned that half of all businesses that have borrowed will struggle to pay their debts by the end of the year, up from 45% last year and this is set to lead to more corporate wariness when it comes to pay rises and taking on new staff, which is likely to have a dampening effect on wage growth.’’
Sarah Coles, head of personal finance at Hargreaves Lansdown, added: “PMI data has showed how worried business are about the outlook, and the market has immediately started pricing in two rises rather than three – and a lower peak.
“This isn’t going to make a major difference today to anyone on a variable rate mortgage, as these tend to rise and fall when the Bank of England moves the base rate.
“It’s likely to mean that the future feels a bit less daunting – because their rate is likely to be hiked less in the coming months. However, it’s still likely to be quite some time before we see these rates fall.”
Coles continued: “It’s good news for anyone looking for a new fixed rate deal, because these mortgages are based on the swaps market – where banks swap a variable rate for a fixed one.
“Swap rates depend on rate expectations, so they’re likely to fall as expectations drop, and fixed rate mortgages may get cheaper. Fixed rate mortgages have already come down slightly from the peak, with the average 2-year fixed rate at 6.74% and the average 5-year rate at 6.22%, according to Moneyfacts.
“They’re still eye-watering rates, but have backed off from 2 August, when the average 5-year rate was 6.85% and the average over five years 6.37%.
“Unfortunately, we can’t expect seismic moves in the immediate future. For that we’ll have to wait until the market expects the Bank of England to be cutting rates – which isn’t on the cards for quite some time.”
