The Bank of England predicts inflation will be below its 2% target in two years time, and close to zero in three years, leading to lower mortgage rates.

Minutes from the Bank of England’s latest interest rate setting meeting triggered some alarming headlines.

But while some outlets warned that the UK was heading for its longest recession since records began, there was actually good news buried in the minutes of its meeting – including suggestions that interest rates may not need to rise by as much as previously expected.

We take a look at some of the positives from the report and how they will impact the housing market.

The recession will be long but may not be too deep

The most eye-catching prediction from the Bank’s Monetary Policy Committee’s (MPC) minutes was that the UK is likely already in a recession, which is expected to last for two years.

If this prediction is correct, it would be the longest recession for the country since records began in 1920.

But what received less attention is the fact that economic growth is expected to contract by 1.9% in 2023 and 0.1% in 2024.

This means that while the MPC is expecting the recession to be long, it does not think it will be too deep.

To put these figures in context, the current recession would be significantly less bad than the one in the wake of the global financial crisis, when GDP growth contracted by 2.6% in a single quarter, and by 7.1% across five quarters in 2008 and 2009.

During the Covid-19 pandemic, GDP dived by a record 19.4%.

Economists have also pointed out that the MPC’s forecast is based on current market predictions for interest rates.

But the MPC suggested interest rates will not need to rise by as much as markets think, suggesting the recession could be less severe than its forecast suggests.

Unemployment will remain reasonably low

The MPC also forecast a rise in unemployment in its minutes, predicting the proportion of people who are out of work would increase from 3.5% now to 4.9% by the end of 2023.

While the increase may sound alarming, it is important to see it in context.

Unemployment is currently at its lowest level since 1974. A rise to 4.9%, would put the number of people out of work broadly on the same level as in early 2021 during the pandemic.

Looking further ahead, the MPC expects unemployment to continue rising in 2024 and 2025 to reach 6.4% by the end of that year. That’s still well below the peak of 10.7% seen in the 1992 recession.

The fact that the number of people likely to lose their job is expected to remain relatively low compared with previous recessions, is good news for the housing market.

In the past, steep rises in unemployment led to a high level of forced sales, as people were no longer able to keep up with their mortgage repayments, triggering house price falls.

But that looks unlikely to happen this time around. Not only are job losses expected to be limited, but lenders are also now required by regulators to work with people who run into difficulties repaying their mortgage, and only repossess their home as a last resort.

Inflation should peak soon, then fall sharply

A major factor contributing to the current slowdown in activity in the housing market is the cost-of-living squeeze.

Steep increases in the cost of food, petrol and energy have made consumers more cautious, and caused them to delay making big purchases, such as a buying a new home.

It also makes it harder for them to pass mortgage affordability tests, as more of their money is being spent on essentials.

But the MPC expects inflation to peak at 11% in the final three months of this year, before falling sharply from the middle of next year.

In fact, it predicts inflation will be below its 2% target two years from now, and be close to zero in three years’ time.

Getting inflation back under control will not only boost consumer confidence, but it will also enable the MPC to reduce the Bank Rate – the official cost of borrowing – which should lead to lower mortgage rates.

Interest rates may not rise by as much as expected

This one is a bit more speculative, as the MPC does not make predictions on interest rates.

But it did appear to signal that the Bank Rate may not need to increase by as much as markets currently expect.

When the MPC held its November meeting, money markets had priced in further increases to the Bank Rate to 5.25%.

As is customary, the MPC based its economic forecasts on interest rates peaking at this level.

Although it continued with its previous rhetoric that it will “respond forcefully, as necessary” to get inflation back down to its 2% target, it also said the impact of previous interest rate rises had not yet been fully felt.

In a press conference following the meeting, Bank Governor Andrew Bailey also said the Bank Rate would have to go up by less than currently expected by financial markets.

He said: “Our best view of where the rate should be … is nearer the constant rate curve [3.00%] than the market rate curve [5.25%].”

Economists have interpreted his comments as suggesting the Bank Rate could peak at between 3% to 4%, meaning it may not rise much further from its current level of 3%.

This is obviously good news for mortgage rates.

Variable rate mortgages, such as tracker products and standard variable rates, move up and down in line with changes to the Bank Rate.

Fixed rate mortgages are based on so-called swap rates, which are themselves based on what the money markets think will happen with interest rates in the future.

In both cases, if interest rates do not need to rise by as much as previously expected, mortgage rates will also be lower.

What does this mean for the housing market?

Activity in the housing market has been hit by a combination of the cost-of-living squeeze, economic uncertainty, and the recent increase in mortgage rates.

If inflation peaks soon and mortgage rates do not rise any higher, it could help to restore consumer confidence.

In fact, the cost of fixed rate mortgages, which has already come down since the mini-Budget, is expected to continue to fall during the final part of the year.

At the same time, a sharp spike in unemployment in 2023 is not expected, meaning there are unlikely to be a high level of forced sales.

Even so, mortgage rates still remain significantly higher than they were at the start of the year, which, combined with higher house prices, will impact affordability.

This is likely to lead to lower buyer demand, and house prices are likely to drop from their current record level in some areas.


Key takeaways

  • Getting inflation back under control will enable the MPC to reduce the Bank Rate – the official cost of borrowing – which should lead to lower mortgage rates
  • Economists are suggesting the Bank Rate could peak at between 3% to 4%, meaning it may not rise much further from its current level of 3%
  • While the recession that the UK is already in will be long, it will not be too deep