UK lenders drop mortgage rates even though headline inflation ticks higher

Rates below 4 per cent available on many deals, as core and service sector inflation continued to trend lower in July

A mortgage rates battle has broken out between lenders after the Bank of England's 0.25 per cent cut to interest rates in early August. Getty Images

UK mortgage lenders are jostling for new customers by cutting rates, as analysts predict a boom in the housing market by the autumn, with Wednesday's slightly higher headline inflation figure not expected to derail interest rate cuts.

The battle between lenders was sparked by the Bank of England's first cut to interest rates in four years earlier this month.

“With UK rates coming down, mortgages are getting more affordable, cancellation rates are easing, and there’s generally more of a buzz about housing stocks,” said Matt Britzman, senior equity analyst at Hargreaves Lansdown.

Another cut to interest rates might be due before the end of the year if inflation data doesn't pose too many concerns for the Bank of England.

However, there was proof that inflation has not been completely defeated on Wednesday, as the market waits for further cuts to interest rates in 2024.

New data showed a slight upwards tick in the rate of inflation from 2 per cent in June to 2.2 per cent in July, still slightly shy of the 2.3 per cent increase forecast by economists polled by the business data company FactSet.

However, those hoping for a September repeat of the Bank of England's 0.25 per cent cut to interest rates earlier this month are likely to be disappointed, as economists comment on the continuing 'stickiness' of inflation.

“What will be disappointing, however, is the prospect that the next rate reduction may get delayed until later in the year,” said Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners.

“The stronger inflation reading now sits above the Bank of England’s inflation target of 2 per cent, causing complications for the central bank as it shifts towards a lower interest rate environment.”

Core inflation, which strips out energy, food, alcohol and tobacco, rose by 3.3 per cent in the 12 months to July, down from 3.5 per cent in June. Inflation in the services sector also fell from 5.7 per cent in June to 5.2 per cent in July.

Ruth Gregory, deputy chief UK economist at Capital Economics noted that even though the inflation numbers will not completely eradicate the Bank of England's concerns over “persistent price pressures”, interest rates should eventually fall “further and faster than markets expect”.

“Accordingly, we are sticking to our view that the Bank will pause in September, and that fading services inflation will mean rates fall to 4.5 per cent this year and 3 per cent next year.”

On Tuesday, robust unemployment and wage numbers again made the case that consumer price index inflation is still prominent, despite falling from a high of 11.1 per cent in October 2022 to the Bank of England's goal of 2 per cent in both May and June this year.

Annual growth in employees' average earnings, excluding bonuses was 5.4 per cent in the three months from April to June down from 5.8 per cent between March and May this year, according to the Office for National Statistics.

The ONS said the rate of unemployment during the April to June period fell to 4.2 per cent from 4.4 per cent in the previous three months.

For Monica George Michail, associate economist at the National Institute for Economic and Social Research the figures indicated “wage growth is gradually slowing but still remains strong”.

“We expect wage pressures to continue falling gradually in the coming months as the labour market cools, with unemployment rising relative to vacancies”, she said.

Meanwhile, a host of mortgage lenders in the UK have been slashing the rates on their products.

On Tuesday, NatWest Bank cut rates across a host of products bringing some on residential loans down to 3.89 per cent, while last Friday, Santander cut rates on some of its mortgages by 0.27 per cent.

The moves follow similar by other lenders in recent days, including Nationwide, Halifax, Barclays and HSBC, as the sub-4 per cent mortgage deal returned to the market in a wave of new offerings.

Virgin Money was one of the first mortgage lender to drop rates below 4 per cent for those with smaller deposits, which typically tend to be first-time buyers. It is offering a 3.99 per cent, five-year fixed rate deal with a fee of £995.

Changing the goalposts

One person who will be paying close attention to the inflation figures is the UK chancellor Rachel Reeves.

The health of the British economy and its ability to grow is fundamental to her tax and spending plans, which will be unveiled in her first budget in the autumn.

However, some economists wonder if she's painting herself into a fiscal corner and may have to radically adjust her plans and expectations.

After an audit of Britain's public finances last month, Ms Reeves announced a £22 billion 'black hole' in the nation's accounts, much of which she was quick to blame on the previous government, even though economists point out that at least £9 billion was down to pay rises for public sector workers.

Nonetheless, the figures served as an unexpected sideswipe at the chancellor's plans, which included no rises to income taxes, national insurance or VAT.

The 'black hole' figures also led Ms Reeves to immediately announce reduced investment in some road and rail projects, while fiscal experts predicted rises in capital gains and inheritance taxes in her Budget at the end of October.

“Unless the budget really makes the case for capital spending, then it’s not clear where growth is coming from,” said Adrian Pabst, deputy director at NIESR. “It’s a mistake to begin with pausing capital spending because it sends a worrying signal.”

One textbook tweak she could make is to change the debt number used in the calculations, a move which some say could allow £16 billion of borrowing.

In a bid to show themselves as the party of economic stability, during the recent election, Labour promised to stick rigidly to rules that require debt to fall as a share of GDP in the fifth year of a Labour government.

So, while the chancellor may not be able to change the rules of the game, she could move the goalposts.

The two main measures of government debt used by forecasters, politicians and chancellors are public sector net debt and public sector net debt excluding the Bank of England, which is sometimes referred to as 'underlying debt'.

The previous Conservative government used the underlying debt figure for its debt target, but the new chancellor could opt to use the headline PSND figure, which would give some 'headroom' for government borrowing.

“One simple change the new government could make would be to instead aim to have headline PSND falling by the fifth year of the forecast,” the Institute of Fiscal Studies (IFS) said in a report last week.

'Fiscal jiggery-pokery'

The question economists are asking is: should the new government make this seemingly innocuous switch to using a slightly different debt figure?

The IFS argues it definitely could, and such a move “seems unlikely to spark an adverse political or market reaction – particularly if any additional margin against a redefined fiscal rule is used for public investment”.

But whether a government should tweak the rules, simply to try to get itself out of a fiscal 'black hole' is more questionable, the IFS said.

“If the government wants to borrow more and spend more, it would ideally make the case for doing so on its own terms, rather than hide behind fiscal jiggery-pokery,” it said.

Stuart Cole, chief macroeconomist at Equiti Capital agrees that if the government wants to borrow and spend more it should “make the case for doing so using its own arguments, rather than resorting to accounting ruses that not many people understand”.

“In any event, the extra borrowing this £16 billion of fiscal headroom will create is unlikely to plug the spending gap the government claims to be facing,” he told The National.

“Neither is extra borrowing of this size likely to materially impact the Bank of England’s thinking on interest rates and inflation. The sums are just too small.”

However, even considering such a move shows that Ms Reeves and her colleagues at the UK Treasury are pulling all the levers they can to kick-start the British economy.

Economists at the NIESR have already urged the new government to grow capital spending by £50 billion to light a fire underneath the UK's sluggish economic growth and to exclude that investment from debt rules.

Without something bold being done on the investment front, Mr Pabst said the UK economy risks being “trapped” in “low investment, low growth (and) flatlining productivity”.