Cheaper mortgages won’t save Britain from recession

Electricity bills are going up. Netflix is adding a couple of pounds a month to the price of a standard subscription, and council tax is going through the roof. Most of us are probably struggling with the cost of living. There is, however, one piece of good news: the sub four per cent mortgage is back. The only catch is that it won’t be around for long.

Santander will this week start offering two- and five-year fixed rate mortgages at just 3.99 per cent, the first time any of the major lenders have been willing to lend money to homeowners for less than four per cent for several months. A price war may be about to break out, with the big lenders competing to offer better and better deals. Chancellor Rachel Reeves will no doubt be hoping that lasts. As the economy slides into recession she needs some help from somewhere, and cheaper mortgages plus a surge in house prices might just stop GDP from shrinking.

Here’s the problem, however: you’d better move quickly. To start with, inflation is still stubbornly high. It is still running at 2.5 per cent, well above the Bank of England’s two per cent target, and it is already expected to rise to 3.7 per cent later in the year as the increases in energy prices driven by Energy Secretary Ed Miliband feed into the index. The rise in employer National Insurance imposed by the Budget comes into force in April, and that will be passed on to consumers very quickly afterwards, driving inflation even higher. Against that backdrop, the Bank won’t be able to cut rates any further and may well have to raise them again.

When the Office for Budget Responsibility updates its forecasts next month, it is expected to downgrade growth to take account of the crushing impact of the Budget. It will likely demand tax rises and spending cuts if the Chancellor is to keep to her fiscal rules. Global investors will inevitably take fright, driving gilt yields up and that will push up the cost of money for the banks, and, in turn, the amount they charge their customers. In reality, home owners should fix their mortgages while they can. Rates won’t stay below four per cent for very long. So the Chancellor can forget about cheaper mortgages rescuing the economy from a recession; it is not going to happen.