In the latest episode of MPowered Mortgages’ The Rate Stuff, hosts tackled the pressing issue of rising inflation and its impact on mortgage rates.
Hosted by Jack Izzard, the discussion featured Mark Parsley, co-founder of CMF-Partners and an expert in trading and capital markets, who warned that mortgage rates could climb as high as 6%.
“Inflation is back with a bang,” Izzard said, noting that CPI inflation jumped from 2.5% to 3% in January.
Key drivers of this jump included VAT on private school fees and rising food prices, with food inflation increasing from 1.9% to 3.1%.
In light of this, Parsley expressed concern that inflation expectations were becoming embedded in the economy.
He added: “The Bank of England said it, they’re worried that inflation expectations are becoming anchored or entrenched in the economy, meaning people expect inflation.
“This is a big factor in managing inflation.”
Looking at broader economic pressures, Parsley warned that energy and food inflation could bring further challenges.
He said: “We are going to see big pain from energy inflation filtering through across the economy. And I think we’ll see food inflation.”
“The UK is a net food importer, so there’s a structural weakness there,” Parsley added.
Izzard also raised concerns about increased Government spending on defence, asking if it could drive inflation higher.
“It will certainly push up the yield in treasuries and Government borrowing,” Parsley said.
With inflation remaining above the Bank of England’s 2% target, significant interest rate cuts appear unlikely.
“The Bank’s mandate is to get inflation to 2%, and it is failing miserably,” said Izzard.
Parsley added: “The real worry is that inflation is more likely to hit 4% than drop to 2%.
“I think one should consider inflation cycles and the way they play, and they never play in an orderly fashion.
“We’ve had high inflation, and we’ve come back down, we’ve started to up- it won’t be orderly. It never is.”
He dismissed expectations of major interest rate reductions, saying: “you can’t expect any significant interest rate cuts, they’re just not on the cards.”
Turning to mortgage rates, Izzard recalled the optimism from earlier in the year when some lenders dipped below 4%.
He said: “We thought, ‘Hooray, the only way is down!’, but how does that look now?”
“The market got ahead of itself,” Parsley responded, pointing out that inflation had rebounded not just in the UK, but also in Europe and the US.
“The yield curve and the SONIA yield curve is extremely flat so two year maturity to five maturity is only two basis points. Two year maturity to the 10 year maturity is 34 basis points.
“That very flat curve is saying 4% – that is our best guess where interest rates are going to be basically for the next few years.”
However, Parsley cautioned that mortgage rates could rise further, with 5-year fixed rates potentially reaching 6%.
“For a 5-year fix, it’s certainly not implausible to have another 100 basis points – rates could hit 6%,” he warned.
“I think 50 more is certain next year. But that is a personal opinion.”
With 1.8 million households set to remortgage in 2025, it is clear that brokers face difficult conversations with their clients.
“The incremental cost of switching from an old mortgage to a new one is about 2%,” Parsley estimated.
He advised borrowers to consider fixing for 3- to 5-years to manage uncertainty.
“The way out for the UK is not a quick fix,” he said.
“I think the Government says that – Keir Starmer always talks about a 10 year plan.
“So I think it’s quite prudent to be swapping or fixing for 3-years to 5-years.”
