Since the Monetary Policy Committee’s (MPC) decision to increase rates by 25 basis points in November, the housing and mortgage markets had gone relatively quiet about when (or rather if) another rise is likely.
Back at the point of that rather minor increase Bank of England governor Mark Carney, and the MPC itself were very keen to point out that (at the time) it was only anticipating another two increases in Bank Base Rate (BBR) over the course of the next 24 months.
Now, the amount of those rises might be rather different to 25bps, however the anticipation was that two such rises would total 50bps and therefore BBR would stand at 1% by November 2019.
Placing that level of BBR in a historical context, 1% is hardly a return to the days of the early 1990s when rates were in double figures.
Indeed, it’s still incredibly far removed from the mid-noughties, pre-Credit Crunch when rates were hovering around the 5% mark.
But if 1%-ish is going to be the “new normal” for any length of time then I suspect there won’t be too many borrowers – or indeed mortgage market practitioners – complaining.
Train of thought
This week’s MPC meeting is interesting because it won’t just be the minutes and vote result published, but also the Bank’s Inflation Report.
This details its train of thought and has given further evidence of its plans over the next two years.
The big question of course is whether the two rate rises over the next two years prediction can be anything other than just a prediction – and it seems the Bank of England may be reassessing it.
Swap rates in the UK are at their highest for a year.
To see what an impact this could have we need only look at what is happening in the US in terms of wage growth and the anticipation that this will mean higher inflation, which will consequently mean the Federal Reserve having to increase interest rates sooner (and faster).
The big share sell-off that started in the US has now quickly travelled round the world, and it not only shows the inter-connectedness of world markets, but perhaps shows a future that few in the UK would have predicted just a few weeks ago.
A steady hand
That said, I think we can be confident this governor and MPC Committee is not going to be rushed into decisions.
However, a number of economists are already suggesting rates will rise more than once in 2018 – Capital Economics appear to be first out of the blocks suggesting if the MPC does decide to try and get inflation down to its 2% target quicker, then there might need to be three or four increases to BBR, rather than the two suggested.
Its of course very interesting that underlying all of this is the Brexit negotiations and what these will mean for the UK economy.
Pantheon Macroeconomics suggested “two further rate increases coming in February and August 2019, provided that the direction of travel in talks with the EU remains towards a soft Brexit”.
Well, all the noises coming out of the government recently suggest that its negotiation stance is moving further and further away from a soft Brexit, despite what chancellor, Philip Hammond, was saying recently.
It seems unlikely the UK will remain in the Customs Union and Theresa May does not appear to be straying too far away from the wants and needs of the hard Brexiteers in her party.
Return to normalisation
If that is the case, then we may all find that the BoE and the MPC has to be far more interventionist in the future than it has been so far.
We know it wants a return to normalisation over the coming years but, given Brexit, its idea of what normal is might change radically.
At the moment that normal seems to peg BBR around the 1-2% level – and for good reason, given the impact rises will have on mortgage borrowers – but moving into unchartered waters with the UK leaving the EU might mean a higher normal might be the pay-off.
Uncertainty exists right across the economic board at present, and there appears to be little chance of this changing anytime soon.
Perhaps today’s publications will be able to give us more confidence in what is coming over the horizon, but given the fluid nature of the situation, I wouldn’t count on it.
