Although the Bank of England held the base rate at 4.5% in March, there has been much speculation about how US President Donald Trump’s recent trade tariff announcement will impact the Monetary Policy Committee’s (MPC) next decision in May.
On April 2, dubbed ‘Liberation Day’, Trump imposed a minimum 10% trade tariff on all imports to the US, with the UK set to pay 10% on all goods. This is in addition to the 25% already applied to steel and aluminum imports, which came into effect back in March. However, the US government has since levied a 90-day pause on the 10% tariff.
How have mortgage lenders reacted?
Due to reactive falls in swap rates since the announcement of a US/UK trade tariff, mortgage rates have certainly begun to fall, with some sub-4 % interest rates entering the market. However, not all lenders have jumped on board immediately, with some opting to exercise greater caution until the storm settles.
Many economists believed there would be 3-4 further reductions in the base rate during 2025 before the turmoil of 2 April. Lenders will, therefore, have already factored in some base rate reductions into their current rates, and possibly into the reductions that we’ve seen since then.
However, Trump’s tariff only led to further speculation that the base rate would fall, with many believing that the Bank of England would now move more swiftly in response to the impact the trade deal would have on the UK economy. This would likely pave the way for lenders to continue cutting rates, sooner than previously expected.
However, since the subsequent 90-day pause of the tariff, the direction of rates has become somewhat less clear. While lenders are unlikely to backtrack on the cuts they’ve already made, we may now see a slowing of rate reductions or lenders holding fast on rate changes while Transatlantic negotiations take place.
Kellie Steed - Content Writer
What will happen now?
With talks of a potential UK-US trade deal underway, it’s difficult to predict the direction of rates in the immediate future. While reductions in the base rate were already expected in 2025, this period of negotiation has led to greater uncertainty about when this may be, and where the base rate will sit by the end of the year.
Indeed, if the negotiations are successful, it’s possible that we’ll see the MPC take a slightly more cautious approach to reducing the base rate. It will likely fall less sharply than originally expected, with lenders following suit with mortgage rates.
However, while negotiations are ongoing, it’s important to understand that the trade tariffs have by no means been scrapped. As we saw immediately after Trump’s announcement, lenders began cutting rates almost immediately, and should the tariff go ahead, there’s no reason to expect that they wouldn’t continue down this path.
Until there is further clarity about UK-US trade relations, it’s very difficult to gauge how quickly the base rate will fall, and whether lender reductions will be dramatic or more subtle as a result. However, the current economic turmoil has shown how important it is to be ready to act quickly. If you’re in a position to switch deals and a competitive fixed rate becomes available, it’s a good idea to take advantage now.
Markets remain turbulent, and it’s not out of the realms of possibility for another surprise to impact rates to travel in the opposite direction. Speaking to a broker who can help you stay on top of improved rate options is strongly advisable.
