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Homeowners should prepare for higher borrowing rates to last indefinitely, one of the country’s most influential economists has warned.
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said mortgage rates would not soon return to the low levels seen in the past decade.
And he claimed it would be ‘terrible’ if they did – as low rates would be a ‘bad signal for the state of the economy’.
Hundreds of thousands of fixed-rate mortgages with interest rates of 3 percent or less are expected to expire in 2025.
But in a blow to homeowners, Mr. Johnson said cheap jobs during the 2010s until before Liz Truss’s infamous ‘mini budget’ were a thing of the past.
‘I don’t think they will (go that low again), and I don’t think they should, and I think it would be terrible if they did,’ he told the Mail.
“It was both a bad signal of the state of the economy and a bad effect on the economy to have effectively zero interest rates for so long.”
He said the ‘good outcome’ would be for interest rates to target around three per cent, with inflation back to the Bank of England’s two per cent target. ‘It’s a more normal economy,’ Mr Johnson explained.
The Bank of England is struggling to keep inflation within its own 2 percent target
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said mortgage rates would not soon return to the low levels seen in the past decade.
‘The Bank of England has been around for 340 years or so and the only period in its entire history when interest rates were this low was in that 10-year period in the 2010s and I really think we should see that as an unfortunate mistake. .’
He added: ‘I don’t think he will return to that region. I think it would be very bad for the economy if they did.
‘However, it is very striking that we have this unexpected, large increase in interest rates and that we have not experienced a housing market crash.
‘And that’s partly because we now have more people owning their homes outright than people with mortgages, and I think more property transactions are done for cash than for mortgages – except for first-time buyers.’
Fixed mortgage rates are usually lower now than they were at the beginning of the year. At the beginning of January 2024, the average five-year fixed rate was 5.55 percent, while the average two-year fixed rate was 5.93 percent.
The Bank of England’s base rate has been cut twice this year, to 4.75 percent, but some mortgage rates have risen recently because of interest rate swaps, which lenders use to price their loans.
But they are still nowhere near the lows of the 2010s, when bank rates were close to zero.
Interest rates have risen since the end of 2021 in an attempt to slow rising inflation, fueled by the Covid pandemic and exacerbated by Russia’s invasion of Ukraine.
Mortgage rates rose as interest rates rose, but there was a spike in mortgage rates after the mini-budget, with many lenders changing rates or withdrawing contracts.
Some mortgage rates have risen recently because of swap rates, which lenders use to price their loans
Chancellor Rachel Reeves has vowed to scrutinize every pound of Whitehall spending ‘line by line’
In his interview with the Mail, Mr. Johnson also warned that the chancellor must make very ‘tough decisions’ in 2025, as she carries out her departmental spending review and looks ahead to the Autumn Budget.
Rachel Reeves has vowed to scrutinize every pound of Whitehall spending ‘line by line’ and warned she ‘will not tolerate’ taxpayers’ money being wasted on low-value projects.
She also told companies earlier in the autumn that she would not ‘come back with more borrowing or more taxes’.
But Mr. Johnson said things would be ‘hit on the head’ at the spending review, as there is ‘no wiggle room’ to borrow and even if she wants to raise taxes, the next budget is not due until the autumn.
“It will be very difficult,” he said, warning that pressure on the chancellor to increase public spending could force tax increases.
‘The pressure on everything, on consumption, is great. So unless it can credibly contain those spending pressures, then maybe it shouldn’t come back for a tax increase.
‘But if she is asking for a significant increase in spending, then tax increases will certainly follow.’
He also warned that predictions of ‘very slow growth’ in household income over the next few years ‘do not make the electorate happy’.
Still, he said the coming year won’t be as bad as the cost-of-living crisis or the recession.
‘But I think it will look like a continuation of this long period of really slow income growth.’
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