Bank of England may ease pressure on mortgage holders today by pausing interest rate rises

The Bank of England is under pressure to finally offer relief to homeowners and pause interest rates, as official figures showed its preferred measures of inflation falling sharply (PA)
The Bank of England is under pressure to finally offer relief to homeowners and pause interest rates, as official figures showed its preferred measures of inflation falling sharply (PA)

The Bank of England is under pressure to finally offer relief to homeowners and pause interest rates, as official figures showed its preferred measures of inflation falling sharply.

The headline CPI inflation rate fell to 6.7% in August, confounding economists who had expected it to increase.

Core inflation, which the Bank of England pays close attention to, fell dramatically to 6.2% from 6.9%, having been expected to only barely tick down. Services inflation, another closely watched measure on Threadneedle Street, also fell sharply to 6.8%, well below the Bank’s own projection of 7.2%.

That will fuel hopes that the Bank could hold interest rates for the first time since 2021 when its Monetary Policy Committee meets tomorrow. The Bank has raised rates at each of the last 14 meetings heaping pressure on mortgage-holders.

Before today’s reading, markets saw yet another hike, to 5.5%, as overwhelmingly likely.

But City traders now believe the decision of whether to hike or pause tomorrow is effectively a toss-up, pricing in a roughly 50% chance of each.

Martin Beck, chief economic advisor to the EY ITEM Club, said: “The case that interest rate rises have now gone far enough is looking increasingly convincing and the MPC could present a decision to hold fire as ‘wait-and-see’ rather than a definitive end to rate rises.”

Though James Smith, developed markets economist at ING, said: “It’s a very close call, but we’re still tempted to say the Bank will follow through with a hike tomorrow.”

If the Bank does raise interest rates, the City believes it will be the final hike before it thinks about bringing rates back down.

Chris Beauchamp, chief market analyst at IG Group said: “It seems that Andrew Bailey will get his wish, and that tomorrow’s hike will be the last one of this cycle.”

The hope that interest will peak soon boosted London stocks. Housebuilders Taylor Wimpey, Barratt Developments and Berkeley were all among the risers as the FTSE 100 climbed back above 7700, eventually closing at 7731.65, the highest since May.

The pound, however, weakened on the prospect of less monetary tightening, as low as $1.234, its lowest level in more than four months, before picking back up.

A lower rate peak would mean good news on mortgage prices. Rates offered by major lenders have steadily trickled down from 15-year highs over the last two months, but appear set to decline further as gilt yields - used to price mortgages - fell today.

The two-year gilt was yielding more than 5% yesterday, but fell to 4.85% today, while the five-year gilt yield fell from 4.53% to 4.42%.

Andrew Montlake, managing director of mortgage broker Coreco, said to expect more sub 5% fixed-rate deals after some lenders started offering products at that level this week: “We have already seen the first fixed rates under 5% and we are now likely to see more choice at this level.”