One of the country’s leading estate agency analysts is warning that interest rate hopes for 2026 may have taken a knock.

Tom Bill, head of UK residential research for Knight Frank, says the past two weeks have changed the outlook for the Bank of England.

“While markets were fully pricing in two quarter-point cuts on January 14, they were only assuming a 45% chance of the same happening a fortnight later” he writes on his blog.

The five-year swap rate, which is based on market expectations and used to price fixed-rate mortgages of the same length, rose to 3.75% from 3.55% over the same period.

The Bank of England’s monetary policy committee (MPC) meets on Thursday this week to decide whether to cut, increase or hold the current base rate.

Bill cites various reasons for what he calls “the mildly alarming” recent jump in borrowing costs.

He says: “Stronger-than-expected UK economic data is one, but recent figures should be treated with caution.

“Retail sales grew 0.4% in December, which pointed to consumer resilience, and the latest Purchasing Managers Index (PMI) score showed the fastest pace of economic expansion in nearly two years. Both were signals the Bank of England was under less pressure to cut.”

Bill suggests that only if more economic cracks start to show, will the likelihood a an imminent rate cut increase. 

Before the recent jump in borrowing costs, the housing market had responded positively to the certainty that followed November’s Budget. 

The number of transactions in December was in line with the five-year average, HMRC said on Friday.

And the Knight Frank man says two other factors have put upwards pressure on borrowing costs in recent weeks.

First, the prospect of a debt-funded spending spree by the Japanese government, which has pushed global bond yields higher in recent weeks.

Second, there is a similar concern closer to home.

The possibility that Prime Minister Keir Starmer could be challenged unnerved bond markets last month when Manchester Mayor Andy Burnham announced he would stand in this month’s Gorton and Denton by-election.

He was blocked from doing do, but the market reaction to the mere possibility showed investors were still concerned about the government’s tight financial headroom.

And Bill concludes in the blog: “If nothing else, it was a useful reminder that a Labour loss in this month’s by-election would be bad news for the Prime Minister but also anyone with a mortgage.”