Economic Developments

Summary of Economic Developments: Key Insights for Clients

As the Bank of England (BoE) navigates economic conditions, its recent actions signal important trends that could affect the UK financial market, including interest rates and mortgage lending. Here’s an easy-to-understand breakdown of recent developments:

Bank of England Interest Rate Cut: A Positive Shift for Borrowers

In its last meeting of the year, the BoE lowered its benchmark interest rate (BBR) by 0.25%, a decision in line with market expectations. This cut reflects a decrease in inflationary pressures and signs of economic weakening. While most policymakers were in favor of the rate cut, the vote was closer than anticipated, signaling caution in future rate decisions.

For the UK economy, this rate cut could bring some relief. Lower interest rates generally lead to cheaper borrowing costs, which benefits those with mortgages, loans, or looking to purchase homes. The BoE has indicated that any future rate cuts will be gradual, meaning rate changes will likely be modest and closely aligned with economic data.

Following the rate cut, UK government bond yields (which often move in sync with interest rates) fell to their lowest point in about two weeks. However, market expectations for additional interest rate cuts were not as aggressive as anticipated. Currently, the market is predicting around 62 basis points (bps) of rate cuts by 2026, implying two more rate reductions.

UK Economic Data Points to Continued Weakness

Recent economic data underscores a slowdown in the UK economy, contributing to the BoE’s decision to ease rates. In November, UK inflation fell to 3.2%, lower than the expected 3.5% and below the BoE’s estimate of 3.4%. This drop in inflation, coupled with weaker employment data (unemployment rising and slower wage growth), makes the case for further interest rate cuts stronger. In addition, the UK’s GDP (Gross Domestic Product) shrank for the second consecutive month in October, signaling economic contraction.

With inflation under control and weaker employment and economic growth, the BoE is more likely to keep reducing rates to support the economy. Currently, markets are pricing in approximately two more interest rate cuts by the end of 2026.

European Central Bank Holds Rates Steady

Across the channel, the European Central Bank (ECB) also chose to keep interest rates unchanged in its latest meeting. This decision aligns with the ECB’s cautious approach to managing interest rates, as it continues to take a data-driven stance. The ECB’s President, Christine Lagarde, confirmed that no discussions were held on rate increases or cuts, emphasizing the uncertainty surrounding future policy moves. For the time being, the ECB remains focused on data trends rather than committing to specific rate movements.

Strong Mortgage Lending Growth Ahead

Looking ahead, the latest mortgage lending reports provide positive news for the UK property market. According to the IMLA (Intermediary Mortgage Lenders Association) forecast, mortgage lending in the UK is expected to see steady growth through 2026 and 2027. Lower interest rates and improved affordability are key drivers behind this growth.

• Gross mortgage lending is expected to increase from £288 billion in 2025 to £320 billion in 2026 and £350 billion in 2027.
• House purchase lending is set to lead the charge in this growth, with more people expected to enter the property market as borrowing becomes more affordable.
• Remortgaging and buy-to-let lending will also see a pick-up as affordability improves, benefiting both homeowners and investors.

The forecast predicts that these trends will help strengthen the UK housing market, despite current economic uncertainties.

Key Takeaways for Clients

1. Interest Rates Are Likely to Fall Further: The Bank of England has lowered interest rates and signals that more cuts are possible, offering potential savings for borrowers with mortgages or loans.
2. Weaker Economic Conditions Support Lower Rates: The UK economy is showing signs of weakening, such as lower inflation and rising unemployment. These factors suggest that interest rates may continue to fall, making borrowing cheaper.
3. Strong Mortgage Market Growth: With lower interest rates and improving affordability, the UK mortgage market is forecast to see growth over the next few years, which could benefit homebuyers, remortgagers, and investors.
4. Eurozone Remains Cautious on Interest Rates: The European Central Bank is taking a wait-and-see approach to interest rates, offering a sense of stability for the broader European market.
5. Optimistic Outlook for Homebuyers and Lenders: The outlook for mortgage lending remains positive, with predictions for increased lending activity driven by improving affordability and more flexible lending criteria.