Interest rates: Big rise less likely after inflation surprise

Caz Blake-Symes • July 20, 2023

Adapted from a BBC article by Daniel Thomas , Faisal Islam & Dharshini David


Interest rates are predicted to rise less sharply after the UK saw a surprise drop in inflation in June.


The Bank of England has raised rates 13 times since December 2021 to try to cool soaring price rises, driving up borrowing costs for millions.


Experts say it is now under less pressure to act after inflation slowed to 7.9% in June, down from 8.7% the previous month. It means UK inflation has dropped to its lowest level in more than a year.


Falling fuel prices contributed to the slowdown in June, while food prices are rising less quickly, according to the Office for National Statistics (ONS) which publishes the figures.


However, the UK's inflation rate remains almost four times higher than the Bank's official 2% target - and far above other developed countries. In the US, inflation is 3%, and in the eurozone it is 5.5%.


"It is a large drop [in the UK] but let's not forget that last month we saw no change at all in headline inflation so in some ways what we are seeing this morning is catching up with the falls we've seen in other similar countries," ONS chief economist Grant Fitzner told the BBC's Today Programme.


Prices of food, energy and services have shot up since last year, squeezing household incomes.


To tackle the problem the Bank has raised interest rates from near zero to their current level of 5%. The idea is that by making borrowing more expensive, consumers will spend less and price rises will cool.


Rising interest rates have also driven up mortgage borrowing costs to their highest level in 15 years, leaving millions of homeowners facing higher monthly repayments.


On Wednesday 19 July, the average two-year fixed residential mortgage rate crept up to 6.81%, while the five-year rate was 6.33%. This time last year rates were closer to 3%.


With inflation finally falling by more than expected, economists are scaling down their expectations of immediate interest rate rises - although they still think there are more in store.



 

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By Caz Blake-Symes • May 1, 2025
Adapted from Zoopla’s April 2025 Housing report I mage: The analysis uses average house prices from the house price index and for first-time buyers to assess mortgage payments at different mortgage rates applied to a 30- year mortgage, at different loan-to-values. One emerging trend that we expect to positively support market activity in the coming months is a relaxation in how lenders assess the affordability of new mortgages. While buyers focus on the mortgage rate they will pay, lenders also check whether the borrower can afford a 'stressed mortgage rate' at a higher level than the borrower will pay. ​ While the average 5-year fixed rate mortgage is around 4.5% today, many lenders are currently 'stress testing' affordability at 8-9%. This makes it harder to secure a mortgage without a large deposit. If average mortgage stress rates were to return to pre-2022 levels of 6.5% to 7%, this would deliver a 15-20% boost to buying power. ​ An average first-time buyer with mortgage repayments of £1,020pcm at a 4.5% mortgage rate would typically have to prove they could afford monthly repayments of £1,550pcm at an 8.5% stress rate. If the stress testing is relaxed to 6.5%, repayments would fall to £1,275pcm, boosting buying power. It's a similar pattern for the average homeowner, while the actual impact will vary by lender and type of borrower. ​ This change would consequently supporting demand and sales volumes, helping to clear the stock of homes for sale, rather than boosting house prices. Other existing rules and regulations that remain in place will continue to impact the availability of mortgage finance.  Comment from Phil Clark “This is potentially very exciting news and will give borrowers a greater choice of products if these rules are relaxed. Regardless of whether you are a First-time Buyer, Looking to move, remortgage or invest in property, there are a huge range of competitive mortgage deals on the market. I will be delighted to discuss your specific requirements and offer you the most suitable deal!” Please call Phil on 0117 3251511 or email info@swmortgages.com For more information about the Mortgage and Protection products we offer, please visit www.bristolmortgagesonline.com Your home/property may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.

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