Homeowners were given hope of three interest rate cuts this year by a new report by leading economists.
The International Monetary Fund raised the prospect of summer cuts to interest rates by the Bank of England, the firstly possibly as early as June, and of a fall from 5.25 per cent to 4.5 per cent in 2024.
“Inflation could be lower (and growth higher) if favourable second-round effects from falling energy prices are stronger and permit earlier and larger rate cuts,” it said in a report on the UK.
The bank’s interest rate-setting Monetary Policy Committee had highlighted energy price falls and declining inflation as issues to watch to “guard against the risk of premature easing”.
The IMF added: “At the same time, there is a risk of delayed easing. Keeping Bank Rate constant as inflation and inflation expectations fall would raise ex-post real rates, which could stall or even reverse the recovery, and lead to an extended undershooting of the inflation target.
“(IMF) Staff’s recommendation of about 50-75 bps cuts (0.5 to 0.75 percentage points) in 2024 is aimed at balancing these risks.”
Cuts to interest rates would benefit people on variable mortgages, but those coming to the end of fixed-rate home loans, taken out when interest rates were close to zero, could still see big increases in their monthly payments.
Renters could also see their payments rising less sharply, or possibly even falling, if landlords’ mortgage payments go down.
Craig Fish, Director at London-based Lodestone Mortgages & Protection, said: “This IMF growth forecast is very positive news and suggests that a cut in June is now more likely.”
Justin Moy, Managing Director at Chelmsford-based EHF Mortgages, added: “The recommended cut of up to 0.75 per cent in mortgage rates will mean around £3,000 less interest costs on an average £200,000 mortgage over the next 2 years, which should give many borrowers some solid respite financially.”
Meanwhile, Jeremy Hunt hailed the new report by the leading economists as showing Britain’s economy had “turned a corner”.
The IMF slightly upgraded its economic forecast for the UK for this year from 0.5 per cent to 0.7 per cent.
“With growth recovering faster than expected, the UK economy is approaching a soft landing, following a mild technical recession in 2023,” it added.
UK economic growth would rise to 1.5 per cent in 2025, it predicted.
But it stressed: “Longer-term growth prospects remain subdued due to weak labour productivity and somewhat higher than expected inactivity levels due to long term illness, only partly offset by higher migration numbers.”
Criticising what he described as “unjustified pessimism” about the UK’s prospect, Mr Hunt said: “Today’s report clearly shows that independent international economists agree that the UK economy has turned a corner.”
But shadow chief secretary to the Treasury Darren Jones said: “ “Millions of people are paying more on their mortgages, prices are still rising in the shops and the UK economy has been rocked by a mini-budget that left working families worse off.”
Liberal Democrat Treasury spokeswoman Sarah Olney added: “The IMF has laid bare what we’ve known from the start: that this Conservative Government has blown a black hole in the country's finances, bringing public services to their knees.”
Growth stalled in the UK in the face of higher borrowing costs, with interest rates increased to 5.25 per cent in a bid to control soaring inflation.
UK CPI (consumer price index) inflation cooled to 3.2 per cent in March, its lowest since September 2021, and is expected to move close to the Bank of England’s two per cent target rate when fresh data is revealed on Wednesday.
The IMF added: “CPI inflation has fallen faster than was envisaged last year and is projected to return durably to target in early 2025.”
But it also stressed that “difficult choices” will need to be made over the coming years to “stabilise public debt, given significant pressure on public services and critical investment” ahead of an election where both parties are expected to focus on the economy.
It added: “This could be achieved, for example, by raising additional revenue from higher carbon and road-usage taxation, broadening the VAT and inheritance tax bases, and reforming capital gains and property taxation”.
As a result, the IMF also said it would “would advise against additional tax cuts” against this economic backdrop, unless it was clear they would credibly drive economic growth.
