Fixed rate reductions, UK in recession, Base Rate held, what next?
It’s now been announced the UK officially entered a recession in the back end of 2023, the Bank of England announced two weeks ago that they were to hold interest rates at 5.25%, but apparently we are winning the fight against inflation as this is continuing to reduce albeit remaining stubbornly above the 2% target.
What does this mean for the market, what impact is it having on rates and what can we expect?
Recent suggestions are that 2024 could prove to be a year of stability rather than volatility in the market. Of course that’s set against the likelihood of a general election and continued conflict elsewhere. 5 year money dropped as low as 3.2% at the end of 2023, has since risen above 4% with a further marginal reduction. All this has led to significant rate reductions from many lenders offering 2 year, 5 year and other fixed rate options, whilst variable terms are still above base rate held at 5.25%.
Not all rate movements have been positive however and it is very important that we remain vigilant to market changes and lender announcements off the back of what remains a changing market place. Lenders continue to review their offering to be as competitive as possible, many reducing minimum loan sizes, debt service cover requirements or offering green initiatives.
Omega has certainly seen continued innovation in the market, offsetting lowered rates with heightened fees, enabling us to tailor terms to meet each client’s exact requirements from an ever expanding range of terms available across the business finance, commercial property market and specialist residential investment sector.
The best advice right now, speak to the experts about your plans and requirements and let us worry about the moving rate market and advise on the best possible solution.
In case you missed December article:
It was the fourth month in a row the Bank has opted to keep rates where they are with interest rates remaining at the highest level for 15 years.
The news was no real surprise in that last month, Andrew Bailey the governor of the Bank of England had stated it was “much too early to be thinking about rate cuts”. There is still quite a balancing act as there were 3 members of the monetary policy committee who voted to raise rates due to wage rises feeding into a broader inflation picture.
Inflation is still above target
Whilst inflation is falling, it remains above its 2% target. A spokesperson from the Treasury said: “We have turned a corner in our fight against inflation and real wages are rising, but we must keep driving inflation out of the economy to reach our 2% target.”
Reports suggest there is no expectation that inflation will come down until 2025, or the 3rd quarter of 2024 at the earliest.
The news follows disappointing GDP figures announced on Wednesday with a drop of 0.3% as the UK economy shrank unexpectedly.
Is the inflation story different across the US and Eurozone?
The US market and the Eurozone
US Federal Reserve announced on Wednesday that it will keep the main rate at a 22-year high but indicated substantial rate cuts of up to 75% in the next 12 months. Will the Bank of England follow suit? Given its largely unchanged statement, it seems unlikely.
The European Central Bank pushed back against the expected cuts to interest rates leaving its borrowing costs at a record high. It also has the same tricky balancing act with inflation as the US and UK.
Reaction from Norway and Switzerland
From outside the Eurozone, eyes have been on The Swiss National Bank and Norge Bank, Norway’s central bank. The SNB also left its policy interest rate unchanged at 1.75%, as analysts expected, citing easing inflationary pressure yet lingering unpredictability in the global economy. Bucking the trend is Norge Bank which once again raised its key interest rate, from 4.25% to 4.5%; the fourteenth time in two years. This announcement is in response to mitigating the risk of prolonged high inflation.
What does all this mean for the commercial lending market?
In recent months there has been increased market confidence that the worst is behind us. In turn, we’ve seen mortgage rates coming down with the market offering improved borrowing terms and fixed-rate deals. As confidence increases, we widely expect to see businesses and investors looking to buy and sell properties at the start of Q1.
Mortgage rates are based on what the market thinks rather than the Bank of England and we’ve already seen fixed-rate mortgages coming down in the real world. The market will be watching to see what happens when many borrowers come off their fixed-rate deals.
Much will hinge on how the financial markets react.
Please do get in touch with the Omega team if you have any questions or are coming to the end of a fixed-rate deal.