Around half the UK’s mortgage holders face paying higher rates over the next three years, the Bank of England has warned, while sounding alarm over the potential impact of Donald Trump’s looming return to the White House.
Its latest financial stability report – released twice a year – showed 4.4 million homes were set to refinance at higher rates.
But it added that around a quarter of borrowers were expected to benefit from lower rates, based on current market pricing, as rates have dropped from the highs seen in 2023.
The central bank’s financial policy committee also identified a risk ahead – that higher trade barriers could hit global growth.
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While it did not directly reference Donald Trump’s warning about raising US trade tariffs when he becomes president again in January, the report said such barriers would feed uncertainty about inflation, potentially causing volatility in financial markets.
“A reduction in the degree of international policy cooperation could hinder progress by authorities in improving
the resilience of the financial system and its ability to absorb future shocks,” the report said.
BANK WORRED ABOUT TRUMP IMPACT
The Bank of England did not directly mention Donald Trump today but hinted at the economic risks associated with his presidency.
The central bank echoed warnings that higher trade tariffs could damage global economic growth and trigger inflation, adding that it could also create volatility in financial markets and raise borrowing costs for businesses and consumers.
“Global fragmentation, namely a reduction in the degree of international trade and policy co-operation, could have several consequences,” the Bank said.
It added: “(It) could hinder progress by authorities in improving the resilience of the financial system and its ability to absorb future shocks.”
Although pressed, Andrew Bailey was careful to avoid a political discussion about Donald Trump. He has dropped several hints about how he feels.
At a speech earlier this month at Mansion House, he urged policymakers to “please remember the importance of openness”.
Asked at a news conference whether the Bank was specifically referring to Mr Trump’s trade tariff warnings, governor Andrew Bailey cautioned that it was “the doing that counts”.
The report spoke of raised global risks more generally and said that any sharp financial market correction could raise credit costs.
When it came to the UK specifically, Mr Bailey also told reporters he saw no trade-off between financial stability and economic growth.
That was after chancellor Rachel Reeves said regulators had gone too far in discouraging risk-taking.
The Bank said its latest stress tests of the banking system had raised no concerns.
It also said that financial stress among households and businesses remained resilient in the face of the price shocks the economy had experienced since the end of the COVID pandemic.
But it signalled that the battle against inflation would continue to drag on.
The report was released against a backdrop of weak expectations for a third interest rate cut this year when the Bank’s rate-setting committee meets in a few weeks’ time.
Just 13% of financial market participants expect a reduction to 4.5% on 19 December.
That is because all the data the Bank relies on to judge whether a cut to borrowing costs is appropriate contains red flags.
The headline measure of inflation is back above the monetary policy committee’s 2% target at 2.3%, following a sharp leap from 1.7% in October due to rising energy costs.
Some other stubborn elements include prices for services.
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Inflation rises beyond forecast
Another stumbling block has come from the pace of wage growth which the Bank fears will stoke demand in the economy, and price growth as a result.
There have been no dissenters on the future path for rates, if recent remarks by Bank rate-setters are anything to go by.
All have spoken of the need for a “gradual” approach.
That does not bode well for millions of new borrowers – and those whose loans are tied to Bank rates – though deals for things like fixed-rate mortgages have eased in line with the two interest rate cuts announced by the Bank to date in 2024.
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Separate figures released earlier in the morning by the Bank suggested confidence remained that borrowing costs were on a downward path, however, as mortgage approvals and lending rose in October.
The number of mortgages approved was at its highest level since August 2022, the data showed.
However, a slight drop in demand for consumer credit and higher savings rates also suggested continued caution over the slowing economic outlook.
It is further evidence of caution among households in the run-up to the budget which, the government had warned, would be “tough”.