What do today’s IMF inflation and growth forecasts mean for borrowers and households? Analysis from Moneyfacts’ Adam French

Moneyfacts Adam French has been sharing his response with us to the news that the latest IMF World Economic outlook has slashed UK economic growth forecasts and heightened inflation expectations

Sharing his thoughts on the effect this could have on household finances, Adam French, Head of Consumer Finance at Moneyfacts, said:

“The longer the conflict in the Middle East wreaks havoc on global supply chains, the more it will damage household finances. The prospect of rates ticking upwards again will be unwelcome news for borrowers, but surging prices and nominal economic growth is financial ruinous for almost everyone. Prices in the UK have already risen by more than 28% since 2020.

“While history doesn’t always repeat, it often rhymes and a second energy shock of the decade threatens to further erode spending power and living standards in a cruel echo of 1970s style stagflation. That much-maligned decade was characterised by intense inflation which peaked at over 25%, high unemployment and industrial unrest.”

“However, lessons can be learned from the past. Prioritising an emergency savings buffer is key as financial flexibility can be invaluable in uncertain times. Locking in certainty where possible, such as fixing mortgage or energy costs and avoiding variable debt can also boost financial resilience. Households should also consider stress-testing their budgets against higher living costs to identify and eliminate any unnecessary spending.”

And what about mortgage borrowers?

In terms of the effect on mortgage borrowers, the cost could be significant says French, commenting:

“The conflict in Iran quickly upended rate expectations and sent borrowing costs skyrocketing as money markets adjusted to substantially higher inflation expectations which is set to further squeeze UK households. 

“Typical mortgage rates have already rocketed to meet these expectations, with two-year fixes increasing by more than 100 basis points from 4.84% to 5.89% in little over a month since the conflict began and five-year fixes up by over 80 basis points, from 4.96% to 5.77%. The cheapest deals available to borrowers have moved dramatically too, the lowest two-year fixed rate available to borrowers across the UK at 60% LTV has increased by over 100 basis points from 3.51% to 4.66%.

“For many borrowers, the cost could be significant. Someone taking out a typical two-year fix will find it costs £100s more per month on average compared to just a few weeks ago. However, the real payment shock will be felt by those coming off older five-year deals, where rates have more than doubled, pushing up repayments by many hundreds of pounds per month.”