Bank of England Holds at 3.75% as Housing Market Dynamics Factor Into Rate Decisions

The Bank of England has maintained interest rates at 3.75%, with housing market dynamics playing an important role in monetary policy transmission. Property prices and mortgage costs significantly influence consumer spending and inflation.
The monetary policy committee’s 5-4 vote reflected consideration of how rate changes affect the housing market. Lower rates reduce mortgage costs for new borrowers and those refinancing, supporting house prices and household wealth. However, this wealth effect must be balanced against inflation risks from excessive housing demand.
The six rate cuts since mid-2024 have provided some relief to mortgage holders, though many on fixed-rate deals haven’t yet benefited. As these fixed terms expire and borrowers refinance at lower rates, consumer spending should receive support. This transmission channel partly justifies the pause to assess effects.
However, housing market conditions also affect inflation through rental costs, which feed into the consumer price index. Rising house prices can push up rents as landlords face higher financing costs or property values. The Bank must consider whether rate cuts stimulate housing demand excessively, indirectly raising inflation through the rental channel.
Governor Andrew Bailey’s projection that inflation will fall to around 2% by spring incorporates assumptions about housing market behavior. If house prices surge unexpectedly, rental inflation could remain elevated, complicating the return to target. The GDP growth forecast of 0.9% and unemployment rising to 5.3% suggest housing demand will remain subdued. Chancellor Rachel Reeves’s budget measures, including utility bill cuts and rail fare freezes from April, don’t directly affect housing but support household budgets, potentially stabilizing mortgage payment capacity as inflation falls to 2.1% by mid-2026.