UK Faces Political Turmoil as Mortgage Rates Dip Below 4%:

In the past week, financial markets remained unperturbed by disappointing inflation figures, yet the deepening political divisions within the UK are becoming increasingly entrenched.

December saw inflation rise to 4%, surpassing market predictions of 3.8%, leading to the resignation of senior members of the Tory party over immigration plans. Understandably, these events may have unsettled both buyers and sellers.

Despite the growing political rifts, caution is advised when interpreting headlines about a rebound in inflation.

The surge in the cost of living primarily resulted from an increase in tobacco duty, following news of slowing wage growth. Wage growth plays a pivotal role in driving core inflation, a major concern for the Bank of England. In essence, there is nothing fundamentally altering the downward trajectory of inflation towards its 2% target.

As the week began, financial markets indicated expectations of five rate cuts of 0.25% throughout the year, a sentiment unchanged by Friday morning, particularly following soft retail numbers. With only eight meetings scheduled for the Bank of England's Monetary Policy Committee in 2024, the possibility of fewer than five cuts raises valid questions. Lenders, however, price fixed-rate mortgages based on market expectations, regardless of their realisation.

Recent weeks have witnessed a meaningful drop in rates as inflation fell faster than anticipated, with the most affordable five-year fixed rates now below 4%. Despite concerns regarding the trajectory of mortgage rates feeling exaggerated, the political landscape is growing increasingly chaotic. Although the government secured a crucial vote on its Rwanda bill, Rishi Sunak faces a prolonged legislative battle with the House of Lords over his plans. More letters expressing no confidence in his leadership are being submitted from the back benches.

The potential resignation of the Prime Minister, similar to the events with Theresa May in 2019, is hindered only by the imminent general election. Recent revelations indicate that the election result may not be as clear-cut as current polls suggest. Under constituency boundary changes, the Labour Party requires a more substantial swing in the vote than Tony Blair achieved in 1997 to secure a majority.

With a disconnected electorate from the two main parties, divided traditional voter bases, and new challengers emerging across the political spectrum, the prospect of a hung Parliament looms. The Liberal Democrats could play a pivotal role in forming a coalition government, but its leader Ed Davey must first secure victory in his seat.

He faces competition from a former deputy postmistress critical of his role in the Post Office scandal. Amidst these political dynamics, the possibility of Biden versus Trump part two in the US adds another layer of complexity, making the outlook for interest rates appear comparatively serene.

Written by Veera Josey, 22nd January 2024