The Bank of England has unwrapped another unwelcome present of an interest rate rise just ten days before Christmas, inflicting fresh cost-of-living pain on borrowers.
It means the chill descending on the UK economy is set to turn into a much colder snap, with the latest hike in interest rates, freezing off growth further in a bid to cool inflation, which is still at the steaming rate of 10.7%.
This is the ninth consecutive rate rise since December last year and the last time the rate stood above 3% was in October and early November of 2008, as the effects of the financial crisis were taking hold and the Bank was in the process of rapidly reducing rates to help the economy.
This inflation is seen as the much bigger Grinch for the UK, threatening to wipe out incomes in an aggressive price spiral which is why the Bank is trying to squeeze out demand despite the economic pain which will be inflicted.
The significant price inflation in services and wage growth in the private sector are both red flagged as risks and although the economy is weakening, with a contraction of 0.1% expected for the last quarter of the year, it’s more resilient than had been expected.
Although supply chain snarl ups have also eased, there are fresh worries about the situation with Covid rules and infections in China and there are still concerns about output which could derail supplies again, pushing up prices.
The uncertain outlook and wavering price pressures meant the vote was not unanimous, with two policymakers keen for rates to remain at 3% and one outlier calling for a more aggressive 0.75% rise to 3.75%.
The rate rise means millions more households will be dealing with more precarious finances next year, with this latest rate rise set to cause another wobble, particularly for those paying off credit cards, on variable mortgage deals or those wanting to find a new fixed rate offer.
The Bank has already flagged in its financial stability report that four million households are to have more expensive mortgages next year and two million will have higher payments by the end of 2025.
However, there are glimmers of better news now being glimpsed by investors.
The predicted peak in UK interest rates has fallen back now, coming in a few notches above 4.5% by August 2023.
This is a reflection of faster than expected easing of inflation and the return of financial stability, with Jeremy Hunt becoming the new chancellor, after the volatility experienced in September.
The strengthening pound also has economic advantages, including to reduce import inflation, which could lead to price pressures that are not as bad as some expect as we move through 2023.
The pound has fallen back a little further against the dollar since the Bank of England’s announcement, and is hovering around $1.23.
It had already dipped back due to expectations that higher rates in the US may linger for longer while UK rates might not go as high as previously expected as recessionary cold front moves in.
Following the Bank of England’s decision to increase the base rate by a further 0.5%, placing the current bank rate at 3.5%, the highest level since October 2008, industry experts share their thoughts on how this is expected to impact the property sector and the wider UK economy.
Mortgages
Homeowners on tracker mortgages or a standard variable rate will be clobbered by the rise immediately. Over the past few years, borrowers have overwhelmingly opted for fixed rates instead, but since September, those who came to the end of their fixed deal may well have reverted to the SVR while they waited for the dust to settle on the chaos in the mortgage market. At the end of November, the L&C mortgage tracker put the average SVR at 6.3%, so if the full rise is passed on, rates will be edging close to 7%.
It’s a horrible blow for anyone who reverted from a deal at 2% or 3%. And given that the average two-and five-year fixed rates have dropped below 6% – and the most competitive deals below 5% – it may be enough to persuade them to fix. This might not be as low as rates go over the next few months. The topsy turvy mortgage market is likely to mean that even with this 0.5pp rise, mortgage rates are likely to continue to come down.
This rate rise is priced in, and the market is still adjusting to new expectations that rates might not need to go as high as had been feared to get inflation under control. However, there are no guarantees, because there’s always the potential for inflation to surprise on the upside, and for market movements to push rates up. It means wait-and-see borrowers can’t be sure how long they’ll wait, or whether it will be worth it in the long run.
Savings
On paper, a rate rise is good for savers. We’re likely to see easy access rates continue to inch up. At the moment, you can make up to 3% on your savings if you’re prepared to accept restrictions, and we can expect accounts to start offering the same rate with more flexibility as we get towards the end of the year. The high street banks increased rates on their branch-based easy access accounts very fractionally at the start of the month, and they may do again.
However, they’re still likely to be offering a fraction of 1%, so if you’re tied to them by loyalty or inertia, this will cost you dear. For fixed rate deals, there’s not such good news, because this rate rise was already largely priced in, so there won’t be a big bump on the back of the announcement. In fact, we’re expecting to continue to see the most competitive rates gradually withdrawn, and the best rates fall.
The market is repricing to take account of the fact that rates are expected to be lower later in the fixed term. However, you can still get one-year fixed rates at over 4.3% and two-year deals at 4.7%. And if the Bank of England’s earlier forecast for inflation at around 5% in 2023 and under 2% in 2024 holds true, you can beat inflation.
What next?
However, there was some good news, because inflation is likely to have peaked, and the bank now expects it to drop back at the start of 2023, as the energy price hike a year earlier drops out of the figures. The new Energy Price Guarantee of £3,000 in April means bills will be lower than it expected last time it crunched the numbers. It’s worth emphasising that lower inflation isn’t the same as price drops – it just means that things will just get more expensive more slowly.
However, it feels like at least one of the pressures on us is set to lessen slightly, and there’s the hope that lower inflation means the Bank doesn’t feel compelled to raise rates so much or so quickly. There was also better news on growth, because while the Bank is still convinced that we’re already in a recession, GDP is only likely to fall 0.1% this winter, which is better than it expected last month. We don’t yet know how long or how deep the coming recession is set to be, but in the interim we can take the better news where we get it”, said Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.
BOE Base Rate Rise – Property Experts Respond
News that the Bank of England has pushed up the base interest rate by 50 basis points to a 14-year high of 3.5% has left many property experts wondering whether property buyers will get more help and whether another rise will be forthcoming.
This is the ninth rise in a year as the bank bids to tackle rocketing prices and inflation – the interest rate was increased last month from 2.25% to 3%.
Lawrence Bowles, the director of research at Savills, said: “While rates today are the highest they have been for more than a decade, they have risen by less than markets or economists were predicting earlier in the year. ‘Likely to see a slowdown in transaction activity’
“However, debt costs are still far higher than they were twelve months ago. This means we’re likely to see a slowdown in transaction activity from mortgaged buyers over the next few months, with cash buyers gaining a relative advantage. With the pace of interest rate hikes slowing and the possibility of rate cuts on the horizon, the picture looks like it will improve for mortgaged buyers in 2024 and beyond. He adds that Savills is forecasting that house prices will begin to recover next year and that the average house price will rise by a net figure of +6% in nominal terms over the next five years.
This Rise Was Largely Expected. Rightmove’s property expert Tim Bannister said: “It’s important to remember that this rise was largely expected by the markets and so will already have been factored into many mortgage lenders’ fixed rates. So, the good news is we don’t expect this rise in the base rate to translate directly into increases in current fixed mortgage interest rates. He added: “In late September we saw a rapid increase in mortgage interest rates beyond the base rate trajectory, so the indications are that the direction of travel of fixed-rate mortgage deals will be downward next year. The rise in the base rate will affect those on a tracker mortgage, though average tracker rates are currently lower than fixed-rate deals.”
3.5% May Not Be the Peak for The Base Rate. Mark Harris, the chief executive of mortgage broker SPF Private Clients, said: “While 3.5% may not be the peak for the base rate, we don’t believe it needs to, or can go, much higher. Fixed rates are influenced by future base rate movements and therefore not directly linked to what is decided this week. Indeed, the pricing of fixed-rate mortgages, which soared after the mini-Budget, continues to drift slowly down, with five-year fixes breaching the 4.5% barrier this week and expected to drop below 4% in the new year. Come 2023, we could see five-year fixes priced below base rate.
Those on base-rate trackers will find their mortgage rate increase by 50 basis points and monthly payments will go up accordingly. For example, a borrower with a £200,000 repayment mortgage with a 25-year term and a pay rate of 3% will see that rise to 3.5%, meaning their monthly payments will rise from £948 to £1,001. With a variable-rate deal, the link between the lender’s variable rate and base rate moves are less transparent. The lender may decide to pass on none, some, all or even more than the base rate rise. If you’re looking to secure a property but believe fixed rates will continue to fall, you could consider a variable/tracker rate product with no early repayment charges, moving onto a fixed product when the rates are more palatable.
Borrowers who are worried about paying their mortgage should get in touch with their lender. It may be possible to extend the term of the mortgage, change to interest-only or part interest-only/ part repayment. There are implications in making these adjustments, but borrowers could do this on a short-term basis and when the opportunity arises, move back to full repayment, making overpayments to get back on course.”
Impact on confidence to buy property. Jeremy Leaf, a north London estate agent and a former RICS residential chairman, said: “Such a substantial increase in base rate is alarming, particularly for its impact on confidence to buy property, which can compromise activity in the housing market. However, this rise has been expected for some time, with lenders already factoring it into pricing of fixed-rate mortgages. Indeed, brokers tell us that they don’t expect these to go any higher; if anything, they are likely to stay the same or continue falling slowly. Existing sales are proceeding, while new buyers are thin on the ground and deciding on next steps over the holiday period. We expect them to slowly return but negotiate hard, aware that the balance has shifted very quickly their way and they will do their best to take advantage.”
Borrowers will feel that rate rises are coming thick and fast. Tomer Aboody, the director of property lender MT Finance, said: “Although borrowers will feel that rate rises are coming thick and fast, hopefully this will succeed in getting double-digit inflation under control quicker. The Prime Minister and his team will then need to come up with some stimulus to turn up the economy and ensure the hurt isn’t long term. He added: “As rates rise and the cost-of-living increases, the negative impact on the housing market is inevitable. Given the importance of the housing market to the wider economy, the government needs to provide some form of assistance to stimulate the market. This could take the form of a restructure of stamp duty or some form of mortgage interest tax relief to alleviate some of the many stresses that borrowers will face in coming months.”
Another agonising squeeze for hard-pressed borrowers. Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, said: “It’s yet another agonising squeeze for hard-pressed borrowers. The Bank of England has ratcheted up the pressure with another 0.5 percentage point hike. It’s going to come as a horrible blow for borrowers who got used to rock bottom rates and haven’t seen anything like this for 14 years. To make matters worse, higher mortgage payments will come on top of all the other soaring costs – from food to fuel – and we have even more hikes looming on the horizon, with energy bills rising again in April. It raises the question of how much more squeezing we can take before we’re finally crushed.”
Simon Gammon, Managing Partner, Knight Frank Finance, comments: “Fixed rate remortgages remain elevated following the mini-budget, so today’s hike to 3.5% was largely baked in. Swap rates suggest we may even see some marginal cuts to mortgage rates through January. The cost of tracker products will continue to rise and are rapidly approaching parity with fixed rate products. Following today’s decision, the best trackers will be in the region of 4%, while the best five year fixed products are around 4.6%. With another interest rate decision on February 2nd, it could be as soon as early February that the two converge or come close. Many borrowers will continue to wait on trackers, betting that fixed rates will fall further, while others will opt to lock in a fixed rate product to get better visibility on their outgoings during what will be a difficult period from an economic perspective.
November and December have been particularly quiet in the property market and it’s clear that many borrowers opted to postpone plans in the wake of the mini-budget while conditions settled. The likely arrival of five-year fixed rate products below 4.5% will represent the new normal in the mortgage market and we’d expect more benign conditions to lift activity to some degree.”
Tom Bill, head of UK residential research at Knight Frank, comments: “Until the impact of the mini-Budget subsides, the UK housing market will exist in an alternate reality where mortgage rates fall and the bank rate rises. More clarity around the trajectory for house prices should come next spring as the mortgage market stabilises and the price expectations of sellers are fully put to the test. Mortgage rates will be at least 2% points higher than this spring, which means it could be a ‘wake up and smell the coffee’ moment for the housing market. Higher borrowing costs will keep transaction volumes in check and mean that price declines become more widespread. We expect prices to fall by 10% over the next two years, not because of the mini-Budget but because the era of cheap debt will have come to an end.”
Jatin Ondhia, CEO, Shojin, comments: “2022’s interest rate rollercoaster ride has taken one more upward lurch, with the Bank of England delivering another blow in its battle to bring down inflation. This latest hike will wrap up the most aggressive year of monetary policy in four decades. We know it has caused weariness and uncertainty across financial markets, and many are now casting their eyes forward to what 2023 might have in store. On a more positive note, yesterday’s CPI data suggest that the inflation fever might be starting to break, which could translate into smaller interest rate increments over the next year. Financial markets had priced in a peak of 6% for the base rate at one point, but signs suggest it might not reach these heights.
Nevertheless, as the UK enters into recession, agility, diversification and foresight will be key in injecting resilience into investment portfolios and minimising investors’ exposure to the current macroeconomic headwinds. With investors juggling risk and opportunity, it should be expected that many will look to balance traditional and alternative investments. Moreover, in light of the recent Autumn Statement, it is likely that tax-efficient investments will see greater demand. I would also expect real estate to remain high on investors’ wish lists, even as house prices recalibrate, with the latest stamp duty cuts likely to increase the market’s resilience in the face of the wider economic turbulence.”
Marcus Dixon, director of UK residential research at JLL, comments: “With the Bank still having to contend with double digit inflation, targeting 2%, this further increase in the bank rate to 3.5% was not unexpected. However, the latest CPI figures for October do suggest that we could have reached the crest of the wave, for inflation at least. The latest CPI figures for November show rates were marginally below forecast at 10.7% (forecast 10.9%) down from 11.1% in October. We expect bank rates to top out at around 4.5%, lower than some were forecasting a few months ago. This aligns with the assumptions in our house price forecasts, with prices expected to fall 6% in 2023 across the UK before beginning to recover in 2024.”
Avinav Nigam, cofounder of real estate investment platform, IMMO, comments: “This increase in interest rates was expected given weak economic growth and high inflation. It was widely expected that the increase would be 50bps this time, versus the last jump of 75bps, which was the biggest in over 30 years. Once the recession fully arrives in coming months, the BoE will have to reduce interest rates to protect living conditions, as has been seen historically. So thankfully, this might be one of the last major rates increases. Rising interest rates have two major consequences for the property market. Firstly, there is an immediate increase in the cost of mortgages for the circa 2 million borrowers on variable rate mortgages. Secondly, there is the longer-term influence on demand and supply, since both acquiring and building new properties becomes more costly.
Both impacts have the same consequence: more demand for rental housing, and therefore a greater need to put time, money and effort into improving our private rental sector housing stock. As monthly finance costs increase for borrowers on variable rates for circa 10 per cent of the UK’s housing, there could be an opportunity for some investors to buy housing to live in, or as investment. The people that are looking to buy or remortgage will however find their mortgages expensive, but will still need a place to call home, and many might shift to the rental market.
As borrowing costs increase, alongside the rise in labour & material prices, new construction also becomes much more expensive. New building projects are being put on pause, curtailing future supply. Again, the result is that the shortage in supply of new housing gets worse. This also increases the demand for rental housing. We see many of our institutional investor partners mentioning that as interest rates rise, investing in and improving rental housing makes even more sense: both commercially and socially.”
Giles Coghlan, Chief Market Analyst, HYCM, comments: “After a year of successive interest rate hikes and soaring inflation, today’s decision from the Bank of England has not come as a surprise to economists or the markets, both of which had fully priced in another 50bps increase. While yesterday’s CPI reading provided some respite to the economy, the cost-of-living grinds on and a print of 10.7% hardly constitutes a Christmas miracle. At its last meeting, the central bank projected a five-quarter recession, and with the Autumn statement out of the way, fiscal conservatism is the BoE’s modus operandi.
The UK is ultimately heading towards stagflation and a deep recession – especially if energy prices surge again once the Russian oil price cap and crude oil embargoes take place. The Federal Reserve signalled a tougher approach on inflation last night, with rates expected to climb above 5% in 2023. This has given the USD reason for strength, which should pressure the GBP in the near-term – so, today’s bleak outlook from the GBP could sink the GBPUSD lower. Once again, the focus remains on inflation for central banks to slow their pace of hiking.”
Andrew Megson, CEO at My Pension Expert, comments: “As interest rates rise yet again, UK savers remain in limbo. Even with inflation easing by a fraction, many will still be uncertain as to whether their money will hold its value in the months to come. It is little wonder that 37% of Britons approaching retirement feeling uncertain about their financial future. When faced with such volatility, some might be tempted to seek security by purchasing an annuity. After all, a silver lining of increased interest rates is annuity rates hitting a 14-year high, offering the potential of a more generous guaranteed income.
However, whilst an annuity might suit some, it does not guarantee absolute security. Locking oneself in with a fixed annuity rate could leave individuals vulnerable to further increases in inflation. Consumers should avoid making any knee-jerk, long-term financial decisions based on short-term economic volatility. There are plenty of options available to help them achieve the security they crave whilst also allowing them to achieve the best possible value for money. And seeking independent financial advice will help them to achieve this. Whilst tempting to react to sudden economic changes, savers must try to remain level-headed, and consult an independent financial adviser about their various options. In doing so, they will begin to regain control of their financial future, and safeguard their hard-saved money.”
Commenting on interest rates at the highest level since October 2008 and acting as a wakeup call for SMEs, Douglas Grant, Group CEO of Manx Financial Group PLC, comments:
“A rise in interest rates was expected despite fears the UK is falling into recession and has reached the highest level since October 2008. The hikes should continue to act as a wakeup call for SMEs to review their existing lending situation and ensure they are prepared.
This week’s slowing inflation data suggested that we may have reached a peak but still represented eye watering numbers and indicate that the start to 2023 will be difficult for many SMEs. We believe that demand for working capital will continue to rise as businesses desperately require liquidity provisions to counteract supply chain issues, increases in wages and a worsening cost-of-living crisis. Our research revealed that over a fifth of UK SMEs that required external finance over the last two years, were unable to access it.
What’s more, over a quarter have had to stop or pause an area of their business because of a lack of finance. SMEs continue to struggle with accessing finance and, worryingly, this lack of availability is costing them and the UK economy in terms of growth at a time when it is needed the most. The amount of growth that is being sacrificed is significant and will require new solutions which are designed to address this funding gap.
Despite positive introductions and extensions to loan schemes in 2022, such as RLS Phase 3, more needs to be done. For some time, we have been calling for a sector focused permanent government-backed loan scheme which brings together both traditional and alternative lenders to guarantee the future of our SMEs. As the government looks for ways to power the economy’s resurgence in 2023, the importance of a permanent scheme cannot be understated, it could act as the fundamental difference between make or break for many companies and, in turn, our economy. We very much hope this is something that becomes a reality.”
CEO of Alliance Fund, Iain Crawford, comments: “The latest inflation figures suggest that the Bank of England’s aggressive tactics are starting to yield results, with the level of inflation falling marginally between October and November. With this in mind, some may feel that a further festive hike ahead of the Christmas break is perhaps a tad Scrooge like. However, the economy is far from out of the woods just yet and so further temporary pain in return for longer term gain is the path we continue to walk.”
Director of Benham and Reeves, Marc von Grundherr, comments: “There’s certainly no cold snap on the cards where interest rates are concerned with yet another substantial increase pushing the base rate to a 14 year high. This will be as welcomed by homeowners as the proverbial lump of coal on Christmas morning, with those on variable rate products now facing yet another immediate increase in their monthly mortgage payments. With many households struggling to heat their homes in these arctic conditions, this will be the last thing they need in the run up to Christmas.”
Managing Director of Barrows and Forrester, James Forrester, comments: “A ninth consecutive increase in interest rates will do little to boost a weary property market that is already showing signs of wear and tear due to the higher cost of borrowing, with buyer demand falling and house prices now following suit. While a Christmas interest rate increase is as desirable as a pair of socks from your aunty, the silver lining to today’s latest hike is that this should hopefully be the peak, with less chance of a further increase on the cards for 2023. Should this be the case, the New Year should bring a far more settled outlook for the UK property market, as we adjust to a new normal following a turbulent few months.”
Managing Director of House Buyer Bureau, Chris Hodgkinson, comments: “The Bank of England has chosen to pile on the financial pressure currently felt by many households for the benefit of the greater good. Unfortunately, the short term consequence of this decision will be thousands stretched even thinner due to the increased cost of their mortgage, with many more homebuyers choosing to sit tight and put off their purchase until 2023, at the very least. This will mean more sales falling through and a further reduction in market activity, which is sure to bring a further decline in house prices. As a result, we can expect the downward trends that have already emerged in recent months to continue well into the new year.”
CEO of RIFT Tax Refunds, Bradley Post, comments: “How Jeremy Hunt stole Christmas. Households across the nation are already facing the toughest Christmas in some time, with the cost of living crisis putting extreme pressure on the ability to heat their homes, let alone stomach the additional financial strain that festive season brings. High levels of inflation have already pushed the cost of our Christmas dinner up by almost 20% since last year alone and we’re yet to see any meaningful reduction in these higher costs despite nine successive interest rate increases. With many of us also utilising overdrafts, loans and credit cards to ensure the spirit of Christmas is maintained for our loved ones, higher interest rates will mean a higher cost when borrowing.”