Jamie Spencer
The Bank of England’s latest financial stability report warns that around half of UK mortgage holders—4.4 million homes—are set to refinance at higher rates over the next three years. However, the report notes a silver lining: about a quarter of borrowers may benefit from lower rates due to a decline from the highs seen in 2023.
Concerns Over Global Trade Barriers
The report also highlights risks posed by higher trade barriers, warning that such policies could hinder global growth. While it stops short of directly referencing Donald Trump’s tariff threats, it acknowledges the potential for increased volatility in financial markets stemming from uncertainty over inflation.
Bank of England Governor Andrew Bailey emphasized the importance of actions rather than warnings during a news conference, cautioning that reduced international policy cooperation could undermine financial system resilience.
UK-Specific Challenges
Domestically, the Bank of England noted that the UK’s financial system remains resilient despite recent price shocks. However, it signaled that the battle against inflation would persist.
The headline inflation rate climbed to 2.3% in November, up from 1.7% in October, driven by rising energy costs and persistent price pressures in the services sector. The pace of wage growth also remains a concern, as it could fuel demand and drive up prices further.
Interest Rate Outlook
The Bank’s rate-setting committee is unlikely to announce a third rate cut this year. Only 13% of market participants expect a reduction to 4.5% at the upcoming December 19 meeting. Policymakers have consistently advocated for a “gradual” approach to monetary easing, citing ongoing economic uncertainties.
Mortgage Market Trends
Despite the rate outlook, there are signs of resilience in the mortgage market. The number of approved mortgages in October reached its highest level since August 2022, reflecting confidence in a downward trend for borrowing costs. Fixed-rate mortgage deals have also eased following two interest rate cuts earlier in 2024.
Household Caution
Meanwhile, a slight drop in consumer credit demand and increased savings rates indicate continued caution among households. This sentiment aligns with warnings of a “tough” budget ahead, reflecting growing concerns over the UK’s slowing economic outlook.
Global Risks and Domestic Challenges
The Bank of England’s report underscores the delicate balance between maintaining financial stability and addressing domestic economic pressures. As the UK faces rising mortgage rates and global economic uncertainty, policymakers are tasked with navigating a complex landscape of risks and opportunities.
