In an economic environment where inflation remains sticky and bond markets continue to experience turbulence, Santander has predicted four base rate cuts from the Bank of England over the course of 2025. While this forecast may seem optimistic given the pressures currently facing the economy, it’s a prediction that those thinking about buying and selling should take note of, given it comes from one of the UK’s largest lenders.
Sticky Inflation and Turbulent Bond Markets
The Office for National Statistics is expected to announce that UK inflation has nudged up to 2.7% in December from 2.6% in November, driven by rising food and petrol prices. This inflationary pressure, combined with a bond market in turmoil, presents a challenge for the Bank of England as it attempts to manage interest rates.
Sterling recently fell by 0.8% to $1.211 to the Pound, while the yield on 10-year UK gilts — a key measure of government borrowing costs — rose to 4.87%, its highest level since 2008. This rise has been driven by concerns about global tariffs and uncertainty surrounding the UK government’s borrowing plans, particularly in the wake of Chancellor Rachel Reeves’ £70 billion spending commitment over five years.
Two-year and five-year swap rates (the interest rates that banks use to trade fixed interest payments for variable ones that help them manage the risk of interest rate changes) have also risen significantly in the last month, indicating higher borrowing costs for lenders, who may be forced to pass these costs onto homeowners through higher mortgage rates.
The Outlook for 2025: What Can We Expect?
Despite this backdrop of economic uncertainty, Santander remains confident in its forecast of four base rate cuts throughout 2025, with the central bank rate expected to fall to 3.75% by the end of the year. This outlook contrasts with more cautious predictions from other economists, many of whom now anticipate only two 0.25% cuts this year, due to the persistent inflation and weak growth prospects.
Frances Haque, Santander UK’s Chief Economist, explains: “Our own forecasts continue to expect a further four cuts over the course of this year, with the base rate ending the year at 3.75%, and remaining between 3% and 4% for the foreseeable future.”
However, Haque acknowledges that volatility in the bond market may force lenders to adjust their mortgage pricing in the short term, even if the Bank of England begins cutting rates. “We’re already seeing swap rates edge up as they respond to volatility in the bond market, caused by an uncertain economic outlook for 2025 both at home and abroad. As such, lenders may well – in the short term – nudge up pricing to reflect the higher swaps.”
What Does This Mean for Scotland’s Property Market?
In Scotland, where the residential property market has remained resilient, perhaps with regional anomalies such as Aberdeen, interest rates dropping by 1% could have a positive impact, as long as the wider UK economy holds up. Cities like Edinburgh, Glasgow and Dundee have seen strong demand for homes in recent years, with buyers drawn to Scotland’s cultural appeal, world-class education, and high quality of life. If Santander’s prediction of four rate cuts materialises, we will likely see an increase in buyer activity as lower mortgage rates make borrowing more affordable.
For buyers, particularly first-time buyers, the prospect of lower interest rates is encouraging. It would reduce monthly payments and increase the amount they are able to borrow, potentially opening doors to homeownership that may have previously seemed closed in property hot spots. For those on variable rate mortgages, a falling base rate could ease financial pressures as monthly repayments become more manageable.
However, with inflation remaining above the Bank of England’s target and bond markets reflecting global uncertainty, it’s clear that the road ahead is not without risks. Investors and property developers will likely remain cautious, keeping an eye on swap rates and economic data as we move into 2025.
A Time for Expert Guidance
Navigating the Scottish property market in these uncertain times requires expert guidance. At Simpson & Marwick, we closely follow the macroeconomic trends that influence property prices, borrowing costs and market demand.
Whether you’re buying your first home, looking to sell, or considering an investment property, our team of specialists can provide the insights and advice you need to make informed decisions. So don’t hesitate to reach out to any of our team today for a chat, we’re happy to share our insight and perspective.
