Rate cuts are off the table until 2031, one of the UK’s biggest lenders says
Key Points
- NatWest's central forecast assumes the Bank of England holds rates at 3.75% every year to 2031
- The bank blames second-round inflation risk after energy prices rose
- It expects inflation to peak near 4% and unemployment to reach 5.5%
- Its base case gives UK house price growth of 0.8% this year
- Swap rates, which lenders use to price fixed mortgages, rose sharply in the half
NatWest’s central economic forecast now assumes the Bank of England leaves interest rates at 3.75% every year between now and the end of 2031.
The bank set out the scenario in its half-year results on Friday (31 July). It expects inflation to reverse course and peak at around 4%, economic growth to slow to 1% this year, and unemployment to climb to a peak of 5.5%.
Rising energy prices following the Middle East conflict sit behind the downgrade. Given the risk of those price rises feeding through into wages and services, NatWest assumes the Bank holds rather than cuts.
The bank attaches a 45% probability to that path. Its downside case, weighted at 19%, has rates falling to around 1.50% by 2028 as demand collapses. Its upside case has them rising towards 4.08%. House prices in the central case rise 0.8% this year, 1.7% next year and 3% in 2028.
Fixed-rate mortgage pricing follows swap rates rather than the base rate directly, and those moved against borrowers over the period. The five-year sterling swap rate rose to 4.07% at the end of June from 3.66% at the end of December, with the ten-year rate up to 4.34% from 4%.
These forecasts exist so the bank can estimate how much money its borrowers will fail to repay, and NatWest does not publish them as guidance for customers.
They still show what one of the UK’s largest lenders considers the most likely course for the cost of borrowing.
Big increase in small deposit mortgages
The forecast comes after NatWest more than doubled its lending to homebuyers with deposits of under 10% in the first half of 2026, taking that part of its mortgage book from £4.52 billion to £9.48 billion.
The bank advanced £1.31 billion to owner-occupiers borrowing above 90% of a property’s value between January and June, against £1.68 billion across the whole of 2025.
Its average loan-to-value on new owner-occupier lending edged up to 72% from 71%, meaning buyers are putting down slightly less. Lending in the 80% to 90% band also grew, from £21.56 billion to £24.84 billion.
First-time buyers took £8.20 billion of the bank’s mortgage lending over the half. NatWest has widened its reach through tie-ups with Rightmove and Landbay, and its total mortgage balances grew 3.6% in six months.
The bank puts the shift in its loan-to-value profile down to a mix of rising house prices and higher new business volumes, including its support for first-time buyers.
