Interest rates will fall faster than expected next year, Barclays predicts
Millions of homeowners will benefit from a whole percentage point drop in interest rates next year, according to City forecasters.
The Bank of England will raise the Bank Rate once more this year despite risks to financial stability, but will bring it down more quickly than expected in 2024, analysts at Barclays predict.
Silvia Ardagna, Head of European Economics Research at Barclays, said interest rates will reach 3.5pc by the end of next year.
It suggests that mortgage borrowers could be better off sticking with a tracker loan rather than switching to a more expensive fixed-rate deal.
This year, there will be one more 0.25 percentage point rate rise in May, which will bring the Bank Rate to a peak of 4.5pc, Ms Ardagna said. This will be maintained until the second half of 2024.
Ms Argagna said: “Given the recent upside to UK growth and the Bank of England’s sanguine attitude towards financial stability risks, we now think the Bank will hike once more at the May meeting.”
The forecasts improve the outlook for mortgage borrowers. Around 1.4 million homeowners are on either variable or tracker rate mortgages, which move in line with the Bank Rate.
For a borrower with a typical £200,000 loan, a whole percentage point drop in the Bank Rate will reduce their monthly mortgage payments by £167 per month.
There are also signs that the price of fixed-rate deals could fall further, because they are priced based on future interest rate expectations. Swap rates – an indicator of future borrowing costs – have dropped to their lowest level since February.
Nick Mendes, of mortgage broker John Charcol, said: “Moving forward, with lower lending volumes expected, and swaps at healthy levels, we could see lenders competing for business again. Rates are expected to decrease on a gradual basis.”
Barclays has forecast a 0.25 percentage point increase in May, which will bring the Bank Rate to a peak of 4.5pc.
This was higher that Barclays had previously forecast, but because of the steeper rises this year, the Bank of England will then cut rates more quickly in 2024.
Ms Ardagna said: “On account of the tighter policy setting we forecast, we add two more 25bp cuts and now expect 100bp of cumulative cuts in H2 2024.”
The consensus among investors is also for a Bank Rate peak at 4.5pc – either at the Bank’s May or June meeting. But they have priced in even earlier falls, anticipating a fall to 4.25pc at the start of 2024.
It comes as indicators have given central bankers a mixed outlook for the economy.
The February Consumer Prices Index jumped by 10.4pc, outstripping the Bank’s forecast of a 9.9pc increase and rising for the first time in four months. But February retail sales data also exceeded expectations.