Are mortgage rates about to fall? Trump's trade tariffs send swap rates lower

Mortgage rates could be set to fall in the aftermath of Donald Trump's trade tariffs after sonia swap rates fell following the announcement.

Yesterday, Trump unveiled his 'reciprocal tariffs' to tackle a trade deficit, with the UK facing the lowest possible tariff of 10 per cent, while the EU is facing a 20 per cent levy.

In response, money markets are betting on there being a greater chance of further interest rate cuts this year and this year.

Fixed-rate mortgage pricing is largely based on sonia swap rates - the inter-bank lending rate, based on future interest rate expectations.

When Sonia swaps rise sufficiently it often results in fixed mortgage rates going up, and vice versa when they fall.

Peter Stimson, head of product at MPowered Mortgages said: 'If you can look beyond the doom-laden predictions of recession and a global trade war, the immediate impact of 'Liberation Day' will be good for mortgage borrowers.'

'Swap rates - which act as the wholesale price of the money mortgage lenders lend out to homebuyers - have fallen sharply since the President's tariffs announcement.

'This gives mortgage lenders an opportunity to cut the interest rates they offer to new customers. At MPowered we will be reducing all of our rates next week, and I expect most lenders will follow suit.

'Mortgages look set to get cheaper in April, but this would be a pyrrhic victory if Britain slips into recession by summer.'

Looking beyond the immediate reaction of the money markets, the Bank of England will now have to juggle the downside risks to economic growth in the light of Trump's tariffs against the upsides risks to inflation.

CPI inflation rose to 3.7 per cent in the 12 months to February and there are some who argue that Trump's tariffs will send this higher over the course of the year.

However, it's not yet clear how Trump's tariffs will influence inflation as well as the impact on the UK's wider economy.

The market consensus at present seems to now point to a greater chance of additional base rate cuts this year.

Prior to the tariffs being announced, markets were broadly pricing in two 0.25 percentage point cuts. Now they're torn between there either being two or three cuts this year.

Economists at Capital Economics are sticking with two 25bps rate cuts this year - from 4.5 to 4 per cent and two more to 3.5 per cent in 2026.

Paul Dales, chief UK economist at Capital Economics thinks Trump's tariffs could result in a third interest rate cut being made this year - potentially with base rate ending 2025 at 3.75 per cent.

'We had already decided that the upside risks to inflation would mean the Bank would want to proceed more carefully and would pause the interest rate cutting cycle in the coming months, perhaps in August after another cut in May,' said Dales.

'And should the inflation risks then fade later in the year, as we expect, it can resume cutting interest rates in November.

'I think it is fair to say that the extra downside risks to economic growth caused by Trump's tariffs may make the Bank more inclined to cut interest rates three times this year.

'But the uncertain influence on inflation from tariffs may mean the Bank can't conclude that the inflation risks have faded.

'So, for now, we are sticking to our forecast. The markets have concluded there is a slightly greater chance of more than two 25bps rate cuts this year.'

Market expectations are already feeding through into lower sonia swaps - the key influencer of fixed rate mortgages.

Riz Malik, independent financial adviser at R3 Wealth said: 'Trump's trade rhetoric may have rattled global markets, but it could end up offering a silver lining for UK mortgage holders.

'Falling swap rates suggest lenders may soon reduce fixed-rate mortgage pricing, easing pressure on homeowners already hit by rising household bills and Reeves' budget.

'While the full economic impact of US tariffs is still unclear, a more competitive mortgage market would be a timely boost for the UK housing sector. President Trump may have earned his state visit after all.'

However, despite swaps falling, so far mortgage rates have all but risen today - both NatWest and Virgin Money have announced they are increasing rates.

Virgin Money is increasing its five-year fixed products by up to 0.14 percentage points while NatWest is upping rates up from tomorrow. Its lowest two year fixes will now start from 4.14 per cent and its lowest five year fixes from 4.13 per cent.

It is likely these decisions were made prior to Trump's announcements last night.