Mortgage Rate Peak Slashed Following Inflation Print: Pantheon Macroeconomics

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The fall in markets' expectations for a higher Bank of England base interest rates has reduced the likely peak for mortgage rates by about 70 basis points, according to a new analysis.

Pantheon Macroeconomics says mortgage rates will continue to rise and peak in August, but shifts in money market expectations and pricing following this week's surprising decline in UK inflation means the peak will be lower than expected.

A key measure of mortgage pricing - the two-year overnight index swap rate - has fallen to 5.46%, from 5.71% ahead of data that showed headline UK inflation rose 7.9% in the year to June, down sharply on May's 8.7%.

"This suggests that the average quoted rate for a two-year fixed-rate mortgage with a 75% LTV ratio will rise to about 5.8% in August, from 5.5% in June, below the 6.5% peak we had previously anticipated," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

Above: "Mortgage rates look set to peak at a much lower level in Q3" - Pantheon Macroeconomics.

UK house prices have turned lower over recent months amidst a pullback in demand owing to rising mortgage rates that are linked to a rise in UK bond yields.

Bond yields rise in response to a higher Bank Rate at the Bank of England, as well as expectations for future moves in Bank Rate.

At one stage in July, markets were anticipating Bank Rate to rise as high as 6.5%, a development that many economists feared would trigger a sharp fall in house prices.

"The forthcoming further correction in house prices looks set to be a little less severe, following the downward revision by markets to their expectations for Bank Rate in the wake of June’s CPI report," says Tombs.

Above: "Prices still need to fall further to improve affordability" - Pantheon Macroeconomics.