The Bank of England’s battle with inflation could leave homeowners facing higher interest rates for longer, as experts warn of a tipping point that will determine the future of borrowing costs.
Millions of mortgage holders who had hoped for significant rate cuts this year may be left disappointed, as policymakers remain trapped between tackling inflation and supporting economic growth.
There is a 95 per cent chance of a rate hold from the Bank according to interest rate swaps, with a 77 per cent chance of a cut at the central bank’s meeting in May.
However, markets are currently split evenly on whether a cut will be made in August. In total, they are expecting rates to fall by 0.5 per cent throughout 2025.
Deutsche Bank’ chief UK economist Sanjay Raja said: “A gradual and careful approach, in our view, leans against the need for back-to-back rate cuts – especially with headline CPI on the rise.”
Stephen Millard, deputy director of the National Institute of Economic and Social Research (NIESR) and a former Bank of England economist, suggested that stagflation fears have robbed the Bank of its ability to cut rates aggressively.
He said: “It is all very well saying this is a supply shock and we won’t respond because [inflation] is only temporary.
“But they kind of said that three years ago, and inflation kept going up and up to 11 per cent, so it is much harder to do that when you have lost that little bit of credibility.”
Interest rates remain at 4.5 per cent, following a recent cut from 4.75 per cent. However, more reductions could take time, despite forecasts from some analysts who expect up to four cuts this year.
For homeowners with variable-rate mortgages, every percentage point increase adds hundreds of pounds to annual payments.
Around 850,000 borrowers are on tracker mortgages, which directly follow the base rate, while those on standard variable rates (SVRs) may see changes at their lender’s discretion.
If interest rates stay elevated, it could mean prolonged financial strain for households already stretched by rising costs.
Katharine Neiss, a former Bank of England economist now at PGIM, suggests that a “tipping point” could come once more data emerges on inflation, energy prices, and the impact of the recent National Insurance raid.
She expects that uncertainty will weigh on economic activity, leading to a growth slowdown that forces rate cuts.
LATEST DEVELOPMENTS:
She added: “This uncertainty has a very depressive effect on the here and now. That translates into weak growth not just today through weak investment, but it also means that in the future growth is going to be weaker. So other things equal, it means interest rates would be expected to be lower.”
The impact of Trump’s trade war and global tariffs has further complicated the Bank’s decision-making, as additional import costs could fuel inflation, forcing policymakers to keep rates high despite economic slowdown.
The NIESR estimates that new tariffs could add almost 0.5 percentage points to inflation this year, while shaving 0.2 percentage points off economic growth.
The Bank’s own analysis reflects this uncertainty, warning that while tariffs may slow the economy, their impact on inflation remains unclear.
Governor Andrew Bailey recently told MPs: “There are risks to the UK’s situation and to UK growth… The impact on inflation could be ambiguous, but the risks to the UK economy and, indeed, the world economy are substantial.”
Experts expects that uncertainty will weigh on economic activity
GETTY
Neiss predicts that the Bank could cut rates four more times this year, taking the base rate down to 3.5 per cent.
However, with inflation still above target and external risks mounting, the pace of those cuts remains uncertain.
For homeowners, the situation remains precarious. Those coming off low fixed-rate deals face significant repayment jumps, while those on tracker mortgages will need to brace for further volatility.
The question now is not if rates will fall, but how fast and how far—and whether the Bank of England can act before more households are pushed to the brink.
