Jason Hollands, managing director of wealth manager Tilney, undoubtedly speaks for the majority of commentators when he states: “This is firmly in-line with market expectations and will likely further crystalize the case for raising interest rates next month in the minds of the Bank of England’s rate setters. The age of record-low interest rates is coming to an end.”
Whether it is necessarily the right course of action, given the state of the UK economy, is more contentious.
Howard Archer, chief economic advisor to the EY ITEM Club is doubtful: “We are far from convinced that raising interest rates this year is the recommended course of action. We believe that it is still likely that inflation will fall back markedly through 2018 as the impact of sterling’s past drop fades and domestic price pressures are limited by lacklustre growth, with only a gradual pick-up in earnings. Brexit uncertainties are also likely to remain elevated well into 2018 and perhaps beyond.
“While it is understandable that the MPC will want to gradually normalise interest rates from their current ‘emergency levels’, we believe it would be better to do so once the economy is on a stronger footing.”
What many are wondering is: will it lead to further rate rises?
Archer’s view is clear: “If interest rates do rise this November, as seems most likely, it is probable that the MPC will tread very carefully on further increases. The EY ITEM Club believes that the MPC will not act again until Q4 2018 when it forecasts that an improving economy, helped by progress towards a Brexit transition deal and reduced squeeze on consumers, will see interest rates lifted to 0.75 per cent. Thereafter, the EY ITEM Club sees the Bank of England increasing interest rates very gradually to 1.25 per cent by the end of 2019, 1.75 per cent by the end of 2020 and 2.25 per cent by the end of 2021.”
Rob Macquarie, an economist at the Positive Money campaign group, told Mortgage Solutions that “monetary policymakers are aware that UK growth is the slowest in the G7, and that business confidence is fragile due to Brexit, so any rise is likely to be limited.”
Nevertheless, he warns: “Raising rates is a very risky exercise. With growth forecasts already so gloomy, the Bank risks sending businesses and consumers the wrong signal. And the UK economy so reliant on consumer borrowing, even a small rise could unleash forces the Bank cannot control.
“Conventional monetary policy is no longer working. The Bank needs to explore better and more sustainable forms of monetary stimulus, so it doesn’t have to rely on ultra-low rates to keep the economy going,” he added.
Impact on mortgage rates
For many hard-pressed consumers, a substantial concern is how any rate rise is likely to affect mortgage interest rates.
Mortgage lenders appear reticent to be drawn on how any rise in base rates may affect borrowers. Halifax declined to respond to enquiries, while Santander replied cryptically: “As a prudent lender, we are always looking at how any external factors, such as changes in the Bank of England base rate may potentially impact customers.
“Bank of England base rate has not risen since July 2007 and following today’s announcement that inflation has hit three per cent, there is increased speculation about a 0.25 per cent rate rise on 2 November. As with the rest of the market, we wait for the Monetary Policy Committee to announce its decision and if necessary, we will clearly communicate any changes to customers at that point.”
A spokesperson for UK finance was a little more forthcoming: “More than half of all borrowers pay a fixed rate, so will not face any increase in costs until their existing deal comes to an end. Borrowers on variable rates may see higher costs sooner, depending on the terms and conditions of their mortgage and how lenders choose to respond to any decision by the Bank to raise base rate. Lenders stress test affordability against significantly higher rates, so the overwhelming majority of borrowers are expected to adjust to a rate rise, but any customer who expects to face difficulty should speak to their lender at the earliest opportunity.”
Yet, as Macquarie points out: “Banks have already been putting up mortgage rates in anticipation of a rise in the base rate. But with with real wages falling, it’s unclear that house-buyers will be able to afford the higher costs. The MPC therefore has good reason to be cautious over further rate rises, to avoid upsetting an already unsustainable housing market.”