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The state of the base rate: a balancing act for the UK economy – Akram

by: Mobeen Akram, national new homes account director at Mortgage Advice Bureau
  • 24/11/2023
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The state of the base rate: a balancing act for the UK economy – Akram
The Bank of England’s decision to pause interest rate hikes offered a glimmer of hope, but what obstacles must we still cross to make it through to the other side?

The recent decision by the Bank of England (BoE) to hold interest rates for the second time in a row at 5.25 per cent is testament to the careful consideration being given to the state of our economy. This pause offers some relief to homeowners who have endured 14 consecutive rate rises, and may signal the end of a challenging period for savers and borrowers.   

That being said, there is still plenty that we need to take with a grain of salt.   


Mortgage rates stabilising  

For many, the pause in rate hikes will feel like a breath of fresh air. Mortgage rates have previously been on the rise, which puts pressure on homeowners, particularly those coming off a low fixed rate.   

This pause will also provide a momentary reprieve for those on tracker or standard variable rates (SVRs), who have been seeing their monthly payments increase substantially over the past year.   

However, interest rates and inflation are a complex issue, and the BoE’s unwavering dedication to a two per cent inflation target is still set to be a steep climb.  

Despite the more positive aspects of the interest rate pause, there is still uncertainty in the UK’s overall economic outlook. The fact that interest rates have been held at their highest level in 15 years underscores the challenging environment in which we find ourselves.  


Divided opinions  

Moreover, the decision to hold off on any rate hikes was not a unanimous one within the Monetary Policy Committee, with six of the nine members voting for a pause. Internal division could be indicative of the complexity of the situation, with varying opinions on the best course of action muddying the playing field.  


Decreases in household wealth  

We know the slew of rate rises has not been without consequences, despite the impact it has had on inflation. A report by the Resolution Foundation suggests that the hikes have led to a substantial drop in household wealth, primarily due to reduced house prices and pension values.  

This decline in household wealth from 840 per cent of GDP in 2021 to 630 per cent in 2023 highlights the potential adverse effects of sticking with prolonged high interest rates. In fact, some argue that maintaining the status quo might not be enough to address pressing issues in the country. Whether it’s families struggling with high prices, increases in the cost of debt, or a rise in unemployment, these are issues which must be addressed.   


The issue in inflation   

From September 2021 to September 2023, food prices increased by 28.4 per cent. Previously, it took over 13 years – from April 2008 to September 2021 – for the average cost of food to rise by the same amount. The latest update from the ONS puts the CPI at 4.6 per cent, down from 6.7 per cent in September.

While this figure is at a two-year low, it remains notably higher than the central bank’s two per cent target.


Hope on the horizon  

We can still say that in this challenging economic climate, the BoE’s decision to pause interest rate hikes offers a glimmer of hope. It has been a tough journey for both homeowners and savers, and the pause may usher in a period of stability and potential opportunities for those looking to enter the housing market. Lenders may also be encouraged to offer more competitive mortgage rates, and we’re seeing fixed rates of sub-five per cent in the market, largely for those with equity in their homes already to put towards a deposit.   

It’s important to acknowledge that we’re walking through what is inherently a delicate balancing act, and while there are challenges to navigate, the BoE’s role as a guardian of economic stability remains critical. Its decisions will shape the future of the UK’s financial health, and we must hope for a positive outcome.   

High interest rates, while sitting within their share of challenges, do serve as a tool to address the pressing issue of inflation, and we believe the path is being charted appropriately in order to steer the economy towards more stable waters. 

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