Has the ‘Trump slump’ done British homebuyers a favour?

The stock market panic prompted by the US president’s tariffs – and his subsequent U-turn and 90-day pause – could now force the Bank of England into cutting interest rates by a half-point, or even more, says James Moore. Either way, for mortgage-holders, relief is on the way

Market meltdowns, recession fears and the upending of the global trading system are the result of Donald Trump’s economic vandalism. But there is a chink of light – at least for borrowers, battered by an extended period of high rates and warned that the era of cheap money is over.

Well, thanks to Trump, it is about to get cheaper.

Charlie Bean, the Bank of England’s former deputy governor, is just the latest to call on his old employer to respond to the chaos – which has knocked trillions of pounds off global stock markets, before Trump’s climbdown sent prices soaring again – by cutting UK interest rates harder and faster. Thanks to the “crazy situation” in the US, he said they should be cut “to at least 4 per cent” next month to reduce the cost of borrowing.

Calling for “at least” a half-point cut at the Bank’s May meeting in a newspaper interview, Bean pointed to what happened in November 2008 when the markets predicted a quarter, or maybe a half-point cut, amid the financial crisis, only for rate-setters to go big by lopping 1.5 percentage points off its base rate.

As ugly as it looks, the current economic situation is not as bad as it was then. The markets have been lurching up and down like the latest super-ride at one of Disney’s theme parks, but there are no banks going cap in hand to taxpayers. At least, not yet.

The City has nonetheless started to price in at least one extra rate cut this year, with the interest rate swaps market moving lower. That matters to potential house-purchasers because it is the swaps market that governs the price of fixed-rate mortgage deals. The view that rates will fall faster – and remain lower for longer – has made it cheaper for lenders to buy money, holding out the prospect of better deals.

A couple of smaller lenders – Coventry and MPowered – have already acted. For new purchase customers, the latter’s two-year fixed rates now start at 4.05 per cent for a 60 per cent loan-to-value (LTV) deal with £999 fee, or 4.29 per cent without. Coventry has, meanwhile, alerted mortgage brokers to a move down with the announcement of the rates it will offer imminently.

The bigger high-street lenders have yet to follow, and they may be inclined to hedge their bets amid the chaos going on around them. But Nick Mendes, mortgage technical manager at broker John Charcol, thinks they will ultimately follow suit.

“MPowered is lowering rates in direct response to the sharp fall in swap rates following the recent market disruption. The tariffs imposed by the US administration … triggered a sell-off across global stock markets,” he said.

“The two-year swap rate dropped from 4.38 per cent to 3.79 per cent in just a few days, and similar movements were seen in gilt (government bond) yields. These are critical benchmarks for mortgage pricing. At the same time, inflationary concerns have taken a back seat, with the Bank of England now under pressure to support growth.”

This also offers some comfort to small businesses looking aghast at the hostile new environment they have to cope with, especially if they trade with the US. They have been crying out for cheaper borrowing costs.

But much still depends on the view of the nine members of the rate-setting Monetary Policy Committee (MPC). The swaps market is influenced by base rates and the carefully coded guidance they offer in their minutes and the speeches they make in between meetings.

Remember that Bean is an ex-member, without the burden of decision making and with much more freedom to express his views. If the MPC disagrees and takes a more cautious stance than the markets currently expect, then the swaps market will respond, and not in a good way.

The Bank’s rate-setters have taken a conservative path to date, repeatedly stressing the need for a “gradual” approach to reductions and sticking to that line even when other central banks have made more substantial moves. Inflation is also running above its 2 per cent target, at 2.8 per cent, even though that figure was less than the City had expected.

However, Trump’s actions and their impact on the global economy will reduce inflationary pressure, both in the UK and globally. Remember too that even the MPC’s hawk-in-chief Catherine Mann has proved sensitive to the difficult economic backdrop the UK faces. She sprung a surprise by voting for a half-point reduction in February, explaining it as necessary to “cut through the noise” and communicate the need for easier financial conditions.

With no sign of movement from Trump – he has doubled down on his tariff plan in the face of the recent market turmoil while engaging in a destructive game of tit-for-tat with China – I expect that the Bank will act. It will have to.

So for borrowers, whether homeowners or businesses, relief is on the way – perhaps in a matter of days if the high-street lenders move as Mendes expects.

I am not sure that the Bank will go big as Bean suggests. But I think there will be another three cuts this year in addition to the quarter-point move the MPC has already made. The clamour for more still is only getting louder.