INTEREST rates could be cut more slowly from next year following Rachel Reeves’ Budget, economists have warned.
The Chancellor revealed her tax-raising Budget yesterday, which she has said is aimed at achieving growth and tackling the cost of living crisis.
But experts believe some of the measures she announced could push up inflation – which would in turn keep interest rates high and cause misery for first-time buyers and homeowners.
Among the measures which could prove inflationary are raising fuel duty from September, pay-per-mile charges for electric vehicle drivers, and a boost to minimum wages.
Pantheon Macroeconomics said this, as well as plans to raise borrowing, could force policymakers to raise their inflation forecasts.
This would give the Bank of England “reason to cut rates more slowly after December than they previously planned” and mean mortgage rates remain higher for longer.
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“The chaos of the past few weeks, along with the Chancellor’s overall choice yesterday to delay fiscal consolidation, shows that the path of least resistance is to continue delaying the difficult fiscal choices,” chief economist Rob Wood told The Telegraph.
“The fiscal outlook remains perilous. Some of the fiscal savings will fail to materialise, and the Government seems to lack the political power to stabilise the fiscal ship in the near term.”
Inflation is a measure of how much the prices of goods and services have gone up over time.
The Bank of England has a target to keep inflation below 2%.
It uses interest rates to help keep control of inflation, as they influence how much people spend and that can affect how shops and businesses set their prices.
Higher interest rates mean higher payments on many mortgages and loans, meaning people must spend more on them and less on other things.
When people spend less, businesses are less willing or able to raise their prices – and so inflation falls.
Inflation eased for the first time in five months this October, meaning an interest rate cut is widely expected next month.
Pantheon Macroeconomics said a rate cut next month is still “nailed on” after Ms Reeves announced Budget measures that would lower inflation in the near term.
This includes a £150 cut to energy bills from April, delaying the fuel duty rise until September, and setting out plans to freeze rail fares and prescription charges.
But if inflation rises again next year, the Bank could implement rate cuts more slowly.
What would this mean for my money?
Slower rate cuts can mean mortgage rates remain higher for longer – leading to higher costs for first-time buyers and some homeowners.
Those hoping to get on the housing ladder would have less access to cheaper mortgage deals.
Meanwhile homeowners needing to remortgage or those on tracker mortgages (which ‘track’ the Bank of England’s base rate) could also face higher monthly mortgage payments.
Currently, lenders are slashing mortgage rates ahead of the Bank of England’s expected base rate cut next month.
Barclays slashed the rate of some of its fixed rate deals by up to 0.3%, while HSBC reduced the rates of its deals by up to 15%.
TSB reduced rates on selected fixed rate deals by 0.1%.
Meanwhile, Santander’s fixed rate deals have reached a three year low of 3.55%.
But if markets believe interest rates are likely to be cut slower next year, it could mean that the best deals start disappearing.
Therefore you may want to act quickly to lock in any good deals that are around currently.
Of course, you should still bear in mind whether the timing is right for you.
On the flipside, slower interest rate cuts can be good news for savers.
That’s because when the Bank of England cuts its base rate, banks often follow suit by slashing interest rates on savings accounts.
If interest rates remain high, those stashing away cash can get more interest back on their savings.
You may still want to act quickly if you’re a saver because of the expected rate cut next month.
If you’re happy to lock your money away, you could put it into a fixed-term account before the interest rate is slashed.
You won’t be able to withdraw your money from this account until the term is up, but your interest rate will remain the same even if the base rate is cut.
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One good option now is the Tembo Money 1-year Cash ISA, which is paying 4.3% in interest to lock your money away for one year.
Plus, you’ll get the benefits of not paying any tax on your interest because it’s an ISA account.
How to get the best deal on your mortgage
IF you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.