Close up of some twenty pound notes

Category: government and politics

Recent data from the Office of National Statistics (ONS) reveals that the UK closed 2023 in a technical recession. However, inflation held at 4 per cent in January 2024 – what does this mean for mortgage rates?

A recession is defined as a decline in Gross Domestic Product (GDP) for two quarters in a row (half a year). With GDP having fallen by 0.1 per cent in Q3 2023, data released yesterday by the ONS shows a further ‘worse-than-expected’ contraction of 0.3 per cent in Q4 2023.

This means the UK is officially in a recession – the first since 2020.

It should be said that the Bank of England always runs the risk of a recession, when raising interest rates to curb inflation.

However, faced with this scenario, will it be a hard or soft landing? If, after a series of base rate increases such as we have seen, GDP fell by a lot, this would be a negative and considered a ‘hard landing’.

But, if GDP only fell by a small amount, this is a better outcome and would be considered a ‘soft landing’.

Whilst the economy is within a recession and the total contraction of 0.4 per cent has been interpreted as worse than expected (0.1 was anticipated for Q4 2023), it is still decidedly a ‘soft landing’.

Nonetheless, despite a recession, inflation holding at 4 per cent will certainly ease pressure on the Bank of England.

The Prime Minister recognised the situation in an interview last weekend, saying he would prefer it if ‘growth was higher’, but that the hard-landing recession some feared has not happened.

Breakdown of inflation data

Core inflation, which excludes price-sensitive items such as tobacco, alcohol, groceries, and energy, remained unchanged at 5.1 per cent, according to ONS figures.

The price of services, rose by 0.1 per cent from 6.4 per cent to 6.5 per cent.

What does this mean for mortgage rates?

Jorden Abbs, chief executive of specialist mortgage broker Commercial Trust, gave his opinion:

Despite the UK economy entering a recession and inflation holding at 4 per cent, the cost of borrowing should stay relatively stable.

What a contraction of GDP will do, however, is reduce the pressure on mortgage lenders to make further rate cuts.

Over the period where swap rates declined, there was pressure on lenders to cut rates, as there was the expectation that savings would be passed on to borrowers, especially given the current cost of living crisis.

Currently, the economic situation will allow lenders to largely justify keeping rates where they are.

However, borrowers should keep a close eye on swap rates as they have been increasing as of late.

Each week email newsletters from Mr Abbs go out to the Commercial Trust database of landlords and property investors, to keep them up to date with factors influencing their property finance decisions. If you would like to sign up, you can subscribe to these emails here.

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