Brexit: Deal or No Deal could hit base rate and then mortgage costs

The Bank of England’s monetary policy committee - which meets monthly to set the base rate on which the costs of most mortgages and house loans are based - says the rate could increase “in the medium term” if there’s an orderly Brexit.

“Assuming a smooth Brexit and some recovery in global growth, a significant margin of excess demand was likely to build in the medium term. Were that to occur, the committee judged that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the two per cent target” say the minutes of this week’s MPC.

The minutes reveal that the committee - which yesterday left the current base rate unchanged at 0.75 per cent - was heavily concerned about the prospects of a No Deal Brexit, but was unable to predict exactly what measures it would have to take, and how that might in turn affect mortgage lending and the wider housing market.

A No Deal exit from the EU might well lead to lower base rate but the BoE stressed this did not necessarily mean good news - and possibly quite the reverse.

“In the event of a no-deal Brexit, the sterling exchange rate would probably fall, Consumer Price Index inflation rise and Gross Domestic Product growth slow. The committee’s interest rate decision would need to balance the upward pressure on inflation, from the likely fall in sterling and any reduction in supply capacity, with the downward pressure from any reduction in demand” say the minutes from this week’s meeting.

Ahead of announcing this month’s base rate decision, the Bank of England revealed it had cut its forecasts for UK growth over the next two years.

It said the UK economy was expected to grow by 1.3 per cent this year, down from a previous projection of 1.5 per cent in May. The Bank also cut its forecast for growth in 2020 to 1.3 per cent from a previous prediction of 1.6 per cent.

The forecasts are based on the assumption that the UK leaves the EU with a deal - however the BoE suggested growth could be much slower if there is a No Deal Brexit.