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Mortgage rates unlikely to reverse recent jump

While interest rates are unlikely to rise as high as investors expected in the immediate aftermath of the “mini budget”, those hoping that the surge in mortgage rates since will be reversed are likely to be disappointed. Admittedly, the peak in Bank Rate priced into money markets has fallen back from 6.6% to 5.5% over the past three weeks. Even that would severely depress the economy, so the MPC may stop raising interest rates before they get to that level. But ultimately, lenders price most mortgage products off market interest rates rather than Bank Rate, so the damage is already done. Indeed, even taking account of the recent reversal, our measure of lenders’ funding costs suggests that fixed mortgage rates will rise to at least 5%, and potentially 6% if lenders maintain their margins. (See Chart 1.) As a result, don’t expect a material drop in quoted mortgage rates anytime soon.

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