Market expectations for peak Bank Rate rise to nearly 6 per cent after stronger than expected inflation and pay data

Financial markets raised their expectation of the peak in the current interest rate rise cycle to nearly 6 per cent in mid-2024, up from less than 5 per cent on the eve of the Bank of England's last rate-setting meeting, the Resolution Foundation said on 17 June 2023¹. The think tank attributed the move to higher than expected inflation and earnings data for April¹.

Inflation for April came in at 8.7 per cent, against a Bank expectation of 8.4 per cent, and annual regular pay growth in April was 7.5 per cent, the highest on record outside the pandemic¹. The foundation said such a high expected peak for Bank Rate had not been seen since the mini-budget in autumn 2022¹.

The foundation estimated that, on current market pricing, the average rate on a two-year fixed-rate mortgage is likely to reach 6.25 per cent this year and will not fall back below 4.5 per cent until the end of 2027¹. It said hundreds of mortgage products had been withdrawn and replaced with new higher rate deals¹.

On repayments, the foundation estimated that total annual mortgage repayments could be £15.8 billion higher by the end of 2026 than in December 2021, when the Bank began raising rates, up from an estimated £12 billion increase based on market expectations at the end of April¹. It said aggregate annual repayments will have risen by £6.3 billion between December 2021 and June 2023, an average increase of £1,500 for the 4.2 million households whose rate will have changed¹.

Source: Resolution Foundation, The Mortgage Crunch, 17 June 2023¹

The foundation said that by the end of June 2023, 4.2 million households in Britain, around 56 per cent of mortgaged households, will have seen their mortgage rate change since December 2021, leaving 3.3 million, or 44 per cent, yet to see their fixed deal expire¹. By the end of 2026 it expects almost all 7.5 million mortgaged households to have moved to a higher rate, with annual bills £2,000 higher on average than in December 2021¹. It said 95 per cent, or £15.0 billion, of the projected increase to end-2026 will have come through by the end of 2024¹.

Why it matters for households

The figures describe a cost that arrives when a fixed-rate deal ends, not when Bank Rate changes. Households whose deal expires in 2024 face an average repayment increase of £2,900 on the foundation's estimates, against £2,000 if rates had followed the outlook at the end of April¹. Those on a floating-rate loan, where the rate is linked directly to Bank Rate, face higher repayments sooner¹.

The foundation said the rise in rates in 2023 alone is expected to increase repayments by 3 per cent of household income, or around £2,000, for a typical mortgagor, a bigger annual hit than at any time in almost five decades¹. It compared this with 1989, when Bank Rate reached nearly 15 per cent but the increase in repayments was about £1,200 in today's money, or 2.4 per cent of household income¹. It also noted that fewer households now have a mortgage: below 30 per cent last year, against almost 40 per cent in 1989¹. How these costs interact with savings rates depends on individual circumstances.

What happens next

The foundation's estimates rest on market interest rates at the end of 13 June 2023, as published by the Bank of England, and it noted that data for 14 June suggested expectations had moderated slightly while remaining well above levels seen before the May Monetary Policy Committee meeting¹. It said market expectations can be wrong and that there is high uncertainty about how far rates will need to rise¹. No further dates are given in the report.