The Bank of England brings stability to the mortgage market

UK house prices climbed 0.7% in January, more than reversing December's 0.5% fall, Halifax reported this morning. That tallies with other indicators spanning sentiment, asking prices and similar house price indices showing a marked improvement in conditions as we entered 2026. 

A flurry of rate hikes from the large high street lenders in the past fortnight did threaten to sap some of that momentum, but dovish comments from the Bank of England (BoE) yesterday will stabilise mortgage rates at the very least, and may even pave the way for further easing. 

Paying off

The government’s November Budget aimed to shore up the public finances through tax rises, creating headroom for the Bank of England to ease policy as inflation pressures recede. That bet looks to be paying off:

"My main message today is one of good news," BoE Governor Andrew Bailey told reporters yesterday. "Disinflation is on track and looks to be ahead of the schedule that we expected in November."

The Bank now expects inflation to undershoot its November forecast by 0.7 percentage points in the second quarter of this year. Roughly 0.5 percentage points of that improvement reflects fiscal measures announced in the Budget. Around half of that impact reflects the energy bills package, which takes effect from April 2026 and is expected to reduce the typical household gas and electricity bill by £134. Inflation is now forecast to return to the 2% target in the spring and then broadly stay in that range until 2029.

Markets are now pricing in roughly a 50% chance of a quarter-point cut at the March meeting. 

Growth has also taken a hit as a result of the Budget. Output is now expected to expand by 0.9% in 2026, compared with a 1.2% forecast in November, before recovering to 1.5% in 2027, slightly below the Bank’s previous estimate. Policymakers attributed part of the softer profile to the drag from higher taxes.

Stable demand

UK construction activity contracted for the thirteenth consecutive month in January. The rate of contraction is slowing, however, "helped by a more stable demand environment and reports of a gradual turnaround in sales pipelines," according to a new S&P Global PMI. 

Housebuilding was once again the weakest performing segment, though the pace of contraction eased to its slowest for three months. Expectations for activity over the coming year have continued to recover from the low point reached last November. Around 38% of firms now anticipate an increase in output over the next 12 months, compared with 17% that expect a decline. This lifted the forward-looking index to its strongest reading since May 2025, although sentiment remains below its long-term average. Survey respondents pointed to easing borrowing costs, higher infrastructure spending and tentative signs of a housing market recovery as potential supports for construction workloads.

Given the BoE outlook published yesterday, interest rates are very unlikely to fall to a degree that housebuilding will recover to government targets with the current policy/regulatory system in place. House minister Matthew Pennycook told the FT last month that there are “live discussions in government about what we might do” to stimulate demand.

Indicators from the broader economy are looking more robust. The services PMI published on Wednesday registered the ninth consecutive monthly expansion. "Higher levels of business activity were linked to greater confidence among clients, new project starts and a post-Budget improvement in investment sentiment," S&P Global said in the release. 

Sustained evidence

The first technology stock rout of the year has arrived. Four of the biggest US technology companies - Alphabet, Amazon, Meta and Microsoft – this week announced that capital expenditures on the likes of data centres and chips will reach about $650 billion in 2026. Tech stocks, gold and cryptocurrencies have all fallen heavily. 

The nervousness over whether the financial gains from artificial intelligence will match the massive spending necessary to access them is already a feature of the market. Quarterly earnings seasons are likely to remain volatile until there is clearer, sustained evidence of rapid AI adoption and the productivity gains that many expect to follow.
Does any of this matter for residential markets? What if a week-long rout turns into something more sustained – akin to the dot-com bubble of the late nineties? 

Greater exposure

There are important differences this time around, not least that today’s technology giants are profitable businesses generating substantial cash flows. 

Even so, luxury housing markets – where buyers typically have greater exposure to risk assets – would feel the effects of any widespread and sudden erosion of wealth. Whether the issue presents a more systemic risk to broader housing markets is an open question that central bankers are still trying to get their heads around. 

Banks are seeking buyers for billions of dollars of loans issued to tech companies for capital expenditure – see the FT's reporting on Oracle earlier this week. The further this runs, the more risk there is that a crash leads to a drying up of credit to businesses and households – the Bank of England warned as such in October, though it lumped AI equity valuations in alongside trade tensions and threats to the Fed's independence:

"Uncertainty around the global risk environment increases the risk that markets have not fully priced in possible adverse outcomes, and a sudden correction could occur should any of these risks crystallise," the BoE said. “As an open economy with a global financial centre, the risk of spillovers to the UK financial system from such global shocks is material.”

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