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Mortgages to get more expensive because Bank of England ‘messed up’ on inflation

Bank of England Governor Andrew Bailey - Chris Ratcliffe/Bloomberg
Bank of England Governor Andrew Bailey - Chris Ratcliffe/Bloomberg

Mortgage costs are likely to rise because the Bank of England “messed up" on inflation and remains behind the curve on interest rate rises, according to Bank of America.

Alastair Ryan, an analyst at the Wall Street bank, blamed a recent increase in so-called swap rates, which are used to price fixed-rate mortgages, on the Bank's credibility being "diminished" among investors.

In a note to clients, BofA said average mortgage rates were now more than a percentage point below their recent peak.
However, Mr Ryan said swap rates, which reflect bets on where interest rates will be in the future, were likely to "move higher again".

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Mr Ryan added in an interview that investors were starting to question Threadneedle Street's message that inflation will fall sharply this year and drop back towards its 2pc target.

He said interest rates, which have climbed from 0.1pc in November 2021 to 4pc over the past year "may well need to go meaningfully higher, because the Bank of England have messed up inflation profoundly".

He added: "If the Bank of England is behind the curve and ends up doing more than they were going to, and the market thinks that's going to happen again, then mortgages will end up being dearer."

Speaking before a recent drop in bond yields following the collapse of Silicon Valley Bank in the US, Mr Ryan said traders had reassessed Governor Andrew Bailey's message that policymakers would soon pause rate rises. However, a raft of global data since the February meeting have heightened fears that inflation will be more stubborn.

"Since then, the market has looked and said, you're a poor guide to your own future behaviour, you're going to have to raise rates by more than you're telling me, for longer. So swap rates have gone up."

Lenders have started to raise the cost of borrowing again following a dramatic drop in the cost of two and five-year fixed rate deals in the wake of former chancellor Kwasi Kwarteng's mini-Budget.

Coventry, one of the UK's biggest building societies, announced it would be increasing its fixed rate deals from next week to reflect changes in the market.

Mr Ryan said a return to profitability meant many banks will choose to absorb higher borrowing costs rather than pass them straight on to customers, which would help to limit any increases.

He also said savings rates were likely to become more competitive, with high street banks now more likely to pass on further rate rises to their customers in full.