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Potential declines in mortgage rates are anticipated following Donald Trump’s introduction of trade tariffs. The shift in market sentiment emerged as Sonia swap rates decreased after the tariff announcement, suggesting a possible easing of borrowing costs for homebuyers.
Tariffs and Market Reactions
President Trump recently revealed his “reciprocal tariffs” aimed at addressing trade imbalances. These tariffs include a 10 percent levy on the UK and a 20 percent levy on the EU.
Financial markets responded by increasing bets on potential interest rate cuts by central banks this year. This anticipation stems from concerns that the tariffs could dampen economic growth, prompting monetary policy adjustments.
Sonia Swaps and Fixed-Rate Mortgages
Pricing for fixed-rate mortgages is heavily influenced by Sonia swap rates, which reflect inter-bank lending costs and expectations regarding future interest rate movements.
Typically, increases in Sonia swaps lead to higher fixed mortgage rates, while decreases tend to push them downwards. The recent drop in Sonia swaps indicates a potential downward pressure on mortgage rates.
Peter Stimson, head of product at MPowered Mortgages, noted that Sonia swaps have fallen by a significant 0.15 percentage points. This substantial change signals a notable shift in market expectations.
Market Predictions and Base Rate Expectations
Current market indicators suggest a heightened probability that the Bank of England’s base rate will conclude the year at 3.75 percent, rather than the previously anticipated 4 percent. This adjustment reflects the market’s reaction to the potential economic impacts of the tariffs.
Stimson commented, “If one can disregard the pessimistic forecasts of recession and a global trade conflict, the initial consequence of recent trade policy developments appears favorable for mortgage borrowers.”
He elaborated, “Swap rates, which function as the wholesale cost of funds for mortgage lenders, have decreased considerably since the President’s tariff announcement.”
“This presents an opportunity for mortgage providers to reduce interest rates for new customers. MPowered Mortgages will be lowering all of our rates next week, and I anticipate most lenders will follow suit.”
Stimson concluded, “Mortgages are poised to become more affordable in April, although this benefit could be overshadowed if the UK economy enters a recession by summer.”
Broader Economic Implications
Beyond the immediate market reaction, the Bank of England faces the challenge of balancing the risks posed by Trump’s tariffs. These include potential downward pressure on economic growth against the upside risks to inflation.
The latest CPI inflation figures showed a rise to 3.7 percent in the 12 months to February. Some analysts suggest that Trump’s tariffs could further elevate inflation throughout the year.
However, the precise impact of the tariffs on both inflation and the broader UK economy remains uncertain and subject to ongoing assessment.
Current market consensus leans towards an increased likelihood of further base rate reductions this year to mitigate potential economic headwinds.
Prior to the tariff announcements, markets had largely priced in two 0.25 percentage point rate cuts. The market sentiment now wavers between expectations of two or potentially three cuts during the current year.
Economists at Capital Economics maintain their forecast of two 25bps rate cuts this year, bringing the base rate from 4.5 to 4 percent, with an additional two cuts to 3.5 percent projected for 2026.
Paul Dales, chief UK economist at Capital Economics, suggests that Trump’s tariffs could potentially lead to a third interest rate cut this year. This scenario could see the base rate ending 2025 at 3.75 percent.
Dales stated, “We had already concluded that upside inflation risks would prompt the Bank to proceed cautiously and potentially pause the rate-cutting cycle in the coming months, possibly in August after another cut in May.”
“Should inflation risks subsequently diminish later in the year, as we anticipate, the Bank could resume cutting interest rates in November.”
“It is reasonable to believe that the increased downside risks to economic growth resulting from Trump’s tariffs might encourage the Bank to implement three interest rate cuts this year.”
“However, the ambiguous effect of tariffs on inflation may prevent the Bank from definitively concluding that inflation risks have subsided.”
“Therefore, for the time being, we are maintaining our existing forecast. Market sentiment now reflects a slightly increased probability of more than two 25bps rate cuts this year.”
Will Mortgage Rates Decrease?
Market expectations are already influencing lower Sonia swaps, a crucial factor in determining fixed-rate mortgage pricing.
Riz Malik, an independent financial adviser at R3 Wealth, commented: “Trump’s trade rhetoric may have unsettled global markets, but it could ultimately provide a benefit for UK mortgage holders.”
“Decreasing swap rates indicate that lenders may soon reduce fixed-rate mortgage prices, offering relief to homeowners already facing increased household expenses.”
“While the full economic consequences of US tariffs remain to be seen, a more competitive mortgage market would offer timely support to the UK housing sector. President Trump’s recent policies may inadvertently benefit the UK housing market.”
Despite the fall in swaps, some lenders have recently increased mortgage rates. Both NatWest and Virgin Money have announced rate increases. Virgin Money is raising rates on five-year fixed products by up to 0.14 percentage points, and NatWest’s rate increases are effective from tomorrow. NatWest’s lowest two-year fixed rates will start from 4.14 percent, and its lowest five-year fixed rates from 4.13 percent.
These adjustments by NatWest and Virgin Money were likely decided upon before Trump’s tariff announcements.