Bank hints at rate cuts, but don't expect Covid-era mortgage deals

There were no treats for borrowers from the Bank of England on Thursday as it kept interest rates unchanged - but it dangled the possibility of more soon.

However, there may not be many more left in the tin.

Even if another interest rate cut is in the offing, the floor for rates may be looming - to the relief of savers, but meaning there's a sting in the tail for millions of borrowers.

The Bank's job is to get inflation to its 2% target - and keep it there.

It expects it to fall to that level soon and remain at or a bit below it over the next couple of years.

It expects subdued growth and a weak jobs market this year, expecting unemployment to hit 5.3%, after finding that policy measures such as minimum wage and tax rises have hit job creation harder than it previously expected.

So the Bank admits rates are "likely to be reduced further". It's a case of when - not if.

But rate-setters also have to be aware of lingering price pressures in the service sector, such as hotel stays, and so the Bank acknowledges the judgement about rate cuts "will become a closer call"

The suggestion is that rates are very close to what is known as their neutral level - neither high enough to tame inflation pressures or low enough to incite them.

And if inflation is heading to that so-called Goldilocks state, the Bank will not want to jeopardise that by cutting rates too far or too fast .

Economists' expectations range from one to three more rate cuts this year. (Some suggest the Bank may even start contemplating raising rates again in 2027.)

That would mean the Bank's base rate hitting a trough of 3-3.5%, considerably above the levels seen just a few years ago.

And that's for two reasons.

First, rates in the early 2020s were exceptionally low due to the need to support the economy through the near-unprecedented shock of the pandemic lockdown. But we are now a long way from that crisis state.

As the Bank of England governor Andrew Bailey told me, Interest rates should see "some further reduction", but will not fall back to the historically low levels seen back then.

He said the low rates were a "product of exceptional things going on, starting with the financial crisis".

Secondly, because of the nature of the intervening inflation shock.

The war in Ukraine triggered a spike in food and energy costs – and so a persistent cost of living shock. It's the staples, their prices jumping out on shelf-edge labels or on bills that disproportionately shape our expectations of inflation.

Front of eyes really does equal front of mind. That kind of psychological scarring can shape our behaviour, for example in the scale of wage rises requested and so future inflation. And that risk to the outlook continues to haunt some rate-setters.

If we are close to the bottom for interest rates, where does it leave savers and borrowers?

Savers may be spared the indignity of seeing the returns on their cash dwindle to near nothing - although institutions sometimes don't need an excuse to reduce savings rates.

For many borrowers, it may mean a bitter taste.

Just consider, for example a borrower coming to the end of a five-year fixed rate deal this year, arranged when rates were at pandemic-era lows. Remortgage today or in the near future and they are likely to be moving on to a higher rate.

In total, the Bank reckons two out of five residential borrowers, close to four million, will face a similar situation in the next few years, with an average 8% rise in repayment costs. (Although it also points out one in three are likely to see lower repayments during this time).

There may be more rate cuts to come from the Bank, but a return to the very cheap mortgages deals of the past is unlikely.