Impact of Bank of England interest rate hikes wanes as mortgage approvals rise

The impact of higher interest rates waned further in March with a sixth consecutive increase in mortgage approvals and greater consumer borrowing, new data shows.

Bank of England figures showed that net mortgage approvals climbed again to 61,300 in March, slightly above the 60,500 seen in February and roughly in line with economists’ expectations.

This meant mortgage approvals hit its highest level since September 2022.

The rise in mortgage approvals, which indicate future borrowing, reflects the fall in mortgage rates at the beginning of the year. There is typically a two-month lag between changing mortgage rates and lending.

The Bank’s figures showed that the ‘effective’ interest rate – the actual interest paid on newly drawn mortgages – decreased by 17 basis points to 4.73 per cent in March, the lowest level since July 2023.

However, mortgage approvals are likely to slow over the next couple of months. Mortgage rates have moved higher as traders have pushed back their expectations for when the Bank of England will start cutting interest rates.

According to Moneyfacts, the average rate on a two-year fix this morning was 5.90 per cent while an typical rate on a five-year fix was 5.48 per cent.

“Recent increases in mortgage approvals for house purchases could be curtailed if the Bank delays its decision to cut rates,” Karim Haji, global and UK head of financial services at KPMG said.

Consumer borrowing meanwhile increased to £1.6bn in March, up from £1.4bn in February, which was entirely driven by higher borrowing on credit cards.

The figures showed that the effective rates charged on interest-bearing credit cards and interest-bearing overdrafts also declined again.

Although interest rates remain at a post-financial crisis high of 5.25 per cent, markets expect the Bank of England to start cutting interest rates this summer. Lower rate expectations reduce the cost of borrowing across the board, loosening financial conditions.

“March’s money and credit figures provide further evidence that the drag from high interest rates is starting to fade and supports our view that the economy rebounded in Q1,” Ashley Webb, UK economist at Capital Economics said.

The looser monetary conditions could also be seen in the money supply. The annual growth rate of broad money – comprising notes and coins, bank deposits, and other financial instruments similar to cash – turned positive in the year to March for the first time since June 2023, growing 0.3 per cent.

Webb said this was a “clear sign” the drag from higher rates was fading.