Budget could delay rate cuts, keep mortgages higher

LONDON — Britons are facing the prospect of higher mortgage rates for longer after the government’s tax-and-spend budget threw off expectations for a series of near-term interest rate cuts.

The Bank of England is widely expected to cut rates on Thursday, in the second such trim this year. But forecasts for a more dovish stance thereafter look shaky, following Finance Minister Rachel Reeves’ announcement last week of £40 billion ($51.41 billion) in tax hikes and a change to the U.K.’s debt rule.

U.K. borrowing costs spiked on Thursday as investors pondered the extent of Reeves’ excess borrowing and the secondary effects of tax rises on growth and inflation. Gilts yields have since continued to hover higher, with the 10-year yield — which moves inversely to prices — last seen at 4.508% on Wednesday.

Mortgage rates also took a hit from the uncertainty, with a number of smaller and mainstream lenders raising mortgage rates on the expectation that interest rates may stay higher for longer. That comes despite a gradual decline in home borrowing costs following the BOE’s initial rate cut in August — its first in over four years.

“It’s confusing times for mortgage borrowers when expectation is for a base rate cut … but fixed rates look set to rise,” David Hollingworth, associate director at broker L&C Mortgages, said in a statement Friday.

Virgin Money became the first major lender to raise mortgage rates after the budget, lifting them by 0.15%. Some banks diverged on their outlook, however, with Santander reducing rates by 0.36%. The average five-year fixed mortgage rate is now 4.64%, down from 5.36% last year, while the average two-year fixed rate is 4.91%, down from 5.81% over the same period in 2023, data from property portal Rightmove showed Thursday.

“This isn’t the radical spike in rates that have blighted mortgage rates in the last couple of years. But if funding costs don’t ease, the sub 4% 5-year fixed rates that we’ve become used to in recent months could be under threat,” Hollingworth continued, noting that more lenders might reconsider their rates going forward.

Reeves’ fiscal reset comes at a perceived inflection point for the Bank of England, which has until now taken a more hawkish approach to monetary easing than some other major central banks.

Economists upped expectations for a faster pace of rate cuts last month following a sharp drop in inflation to 1.7% and an easing of wage growth. However, post-budget forecasts cast doubt on that view, with the government-funded but politically neutral Office for Budget Responsibility saying near-term economic growth and inflation now look set to remain higher.

J.P. Morgan’s U.K. economist Allan Monks said in a note Monday that BOE policymakers are now likely to stick with their previously signaled “gradual approach” to rate cuts. He added that interest rates…