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Homeowners are prepared to pay high mortgage rates for longer as government borrowing costs have skyrocketed.
The government's high borrowing costs come amid fears that inflation is rising again, which could lead the Bank of England to keep rates unchanged.
Economists had previously expected the Bank of England's base rate, currently at 4.75 per cent, to begin to slowly fall, perhaps to as low as 3 per cent by the end of this year.
But the central bank is likely to want to postpone further cuts if inflation starts to bite again, even though economic growth is sluggish.
Russ Mould, chief investment officer at pensions firm AJ Bell, said markets had reduced the number of interest rate cuts they expected this year, with most traders' bets suggesting two rather than four.
He said he would “not be surprised” if the Bank of England decided not to cut rates in February, when the next decision is due.
“People are looking at inflation and wages,” he said. Food and energy prices are rising, which could mean higher inflation.
High inflation combined with poor growth is known as stagflation, a scenario that governments try to avoid as household incomes decline.
Oil prices have started to rise again, which could suggest an increase in energy prices, as well as an increase in the cost of gasoline at the pump. Brent crude oil has risen 3.4 percent since the beginning of the year.
Susannah Streeter, head of money and markets at stockbroker Hargreaves Lansdown, said that in the UK “there is particular concern brewing about stagflation taking hold, as inflation has been rising and wage growth is still is intense, while the economy has stagnated. “There are concerns that this could limit interest rate reductions this year.”
Yields on long-term UK government bonds hover around highs not seen since 1998, with 30-year debt trading around 5.24 per cent.
Government bonds maturing in 10 years have also risen, above levels seen in October 2023 after Liz Truss' disastrous mini-budget.
As well as suggesting more expensive borrowing for households, expensive public debt costs the Treasury more in interest payments, potentially meaning less spending is needed on other projects or more taxes.
The higher cost of public borrowing is a consequence of investors selling debt out of fear of inflation. Central banks use higher interest rates to try to control inflation, limiting the possibility of rate cuts.
Home loan interest rates are influenced by a number of factors, one of them being the base rate set by the Bank of England.
Another is competition between lenders who want more customization, which can lead to so-called rate wars, which drive down prices.
A modest rates war broke out last week, when First Direct cut borrowing costs, albeit by just 0.3 per cent, taking a five-year fixed rate deal to just 4.13 per cent. First Direct followed its owner HSBC in cutting fees.
Nick Mendes of brokerage John Charcol said other lenders could follow suit, although the cuts will be small. “It reflects the competitive nature of the market and offers potential savings for first-time buyers, house-movers and those looking to remortgage,” he said.
“While we are likely to see further rate cuts in the coming weeks, they are expected to be modest, with only minimal changes to the best offers currently available.”
