MPC Preview – Mortgage Strategy

Mortgage market participants are expecting the Bank of England base rate to hold at 3.75% but say a rise should not be ruled out.

In the last BoE Monetary Policy Committee meeting in March, members voted unanimously to keep base rate at 3.75%.

The decision to hold base rate came as most MPC members decided the inflationary impact of the war in the Middle East made cutting rates too risky.

The conflict has caused swap rates to rise, dragging up the cost of fixed-rate mortgages.

Before the conflict began, lenders were pricing in a March base rate cut and expected at least one other reduction during 2026.

Earlier this month, inflation rose to 3.3% in the year to March, up from 3% in February, as the war in Iran triggered the biggest jump in petrol and diesel for more than three years.

In the last MPC Meeting, the committee said it would continue to closely monitor closely the situation in the Middle East and its impact on global energy supply and energy prices.

It said it “stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term”.

John Charcol mortgage technical manager Nick Mendes believes this is “unlikely to be a straightforward decision”.

Mendes comments: “A split vote looks likely, and in some ways the vote split may matter almost as much as the headline decision itself.”

“Markets are already pricing in a higher rate environment. Two, three and five-year SONIA swaps are all sitting around 4.18% to 4.21%, and the forward curve points to three-month SONIA moving higher over the coming months rather than falling back quickly. That suggests markets are not treating current rates as the end point.”

“The questions now are when any increase comes, how high Bank Rate ultimately needs to go, and how quickly the Bank feels it needs to act.”

And while the expectation is the rate will be held at 3.75%, Mendes says a rise this week “should not be ruled out”.

He explains: “If the MPC accepts that rates are likely to have to move higher, there is a case for acting now rather than waiting until the next meeting on 18 June. Waiting another seven weeks risks allowing further inflation pressure to build and could increase the chance of a larger move being needed later.”

However, he highlights that a hold doesn’t mean good news. “A tight hold, for example a 5-4 vote, would still be a hawkish hold.

It would tell the market that the Bank is only one vote away from raising rates, and that is not the sort of backdrop that usually gives lenders the confidence to cut aggressively.”

“We may still see selective mortgage rate cuts where individual lenders want to compete, or where swap rates ease. But I would expect any reductions to be patchy rather than a broad shift across the market.”

Meanwhile, Nottingham Building Society chief savings officer Harriet Guevara suggests a hold at 3.75% “now feels very likely” but says the bigger story is how much the outlook has shifted.

Guevara notes: “Just a few months ago, markets were pricing in further cuts. Now, with the conflict in the Middle East driving energy prices higher and inflation expectations rising, markets are pricing that rates are more likely to go up than down, potentially reaching 4.25% by the end of the year.”

She adds: “On the mortgage side, the prospect of rate rises rather than cuts makes this an important time for borrowers to take stock. Anyone coming to the end of a fixed deal in the next six to twelve months should speak to a qualified mortgage broker who can assess their options and help them make the right decision for their circumstances.

The market is moving, and professional advice is the best way to make sure you’re not caught out.”