A week of news showing the UK economy is slowing has ironically yielded a positive for mortgage holders and the broader economy itself – borrowing is now expected to become cheaper faster this year.
Traders are now pricing in three interest rate cuts in 2025, according to data from the London Stock Exchange Group.
Earlier this week just two cuts were anticipated. But this changed with the release of new official statistics on contracting retail sales in the crucial Christmas trading month of December.
It firmed up the picture of a slowing economy as shrunken retail sales raise the risk of a small GDP fall during the quarter.
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That would mean six months of no economic growth in the second half of 2024, a period that coincides with the tenure of the Labour government, despite its number one priority being economic growth.
Clearer signs of a slackening economy mean an expectation the Bank of England will bring the borrowing cost down by reducing interest rates by 0.25 percentage points at three of their eight meetings in 2025.
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If expectations prove correct by the end of the year the interest rate will be 4%, down from the current 4.75%. Those cuts are forecast to come at the June and September meetings of the Bank’s interest rate-setting Monetary Policy Committee (MPC).
The benefits, however, will not take a year to kick in. Interest rate expectations can filter down to mortgage products on offer.
Despite the Bank of England bringing down the interest rate in November to below 5% the typical mortgage rate on offer for a two-year deal has been around 5.5% since December while the five-year hovered at about 5.3%, according to financial information company Moneyfacts.
The market has come more in line with statements from one of the Bank’s rate-setting MPC members. Professor Alan Taylor on Wednesday made the case for four cuts in 2025.
His comments came after news of lower-than-expected inflation but before GDP data – the standard measure of an economy’s value and everything it produces – came in below forecasts after two months of contraction.
News of more cuts has boosted markets.
The cost of government borrowing came down, ending a bad run for Chancellor Rachel Reeves and the government.
State borrowing costs had risen to decade-long highs putting their handling of the economy under the microscope.
The prospect of more interest rate cuts also contributed to the benchmark UK stock index the FTSE 100 reaching a new intraday high, meaning a level never before seen during trading hours. A depressed pound below $1.22, also contributed to this rise.
Similarly, falling US government borrowing has reduced UK borrowing costs after US inflation figures came in as anticipated.