According to Oxford Economics’ key themes for 2023 report, the Monetary Policy Committee (MPC) spent 2022 “aggressively” putting up rates to contend with rising inflation and signalled further rate increases were coming. It said keeping it at its current level would result in inflation falling short of its two per cent target, but said inflation had likely now peaked.
Oxford Economics predicted that for this reason and like other central banks, “the BoE is now entering the end game for monetary tightening”.
Base rate hits four per cent
The firm said the base rate would rise to four per cent in February which would be higher than the long run neutral rate. A neutral rate is when monetary policy is no longer stimulating or restricting economic growth.
Oxford Economics said a reduction to the base rate would not happen immediately, as it predicted that the “MPC will wait longer before cutting rates this time around”.
The firm said following criticism towards the central bank, the MPC would be “wary” of reducing rates while inflation is still more than double the two per cent target.
It added: “On balance, we think the BoE will err on the side of caution and that once Bank Rate reaches its terminal rate of four per cent, it will remain there for the rest of 2023.”
Commercial property at risk
In addition to its prediction on the base rate, Oxford Economics also said that, based on mortgage affordability, houses in the UK were currently overvalued by 30 per cent. However, this was down from the 37 per cent overvaluation it calculated in September, following the mini Budget when mortgage rates rose.
It said swap rates were still higher than they were at the start of 2022 and mortgage interest rates had also risen. For a homeowner coming to the end of their fixed rate term, Oxford Economics said they could be offered an interest rate three or four per cent higher than their old deal.
It added: “In residential markets, we expect the sudden deterioration in mortgage affordability to trigger a near-term slump in transactions. But we’re optimistic that the number of forced sales will be limited by a relatively low peak in unemployment and the high share of fixed rate mortgages.”
House prices to fall 10 per cent
It said a low number of forced sales would lead to modest house price falls of 10 per cent over the year. While the buy-to-let market remains uncertain, the firm said buy-to-let properties were shielded from negative equity due to the typical maximum LTV of 75 per cent for mortgage loans.
Oxford Economics said the commercial property market was “similarly vulnerable” to disruption as banks could “insist on lower loan-to-value ratios than were available five years earlier”.
Coupled with falling property prices, the firm predicted this could lead to “refinancing shortfalls”.
It said: “The scale of the 2023 correction in real estate prices will depend on the extent of forced sales. We’re particularly concerned about the commercial real estate market in this respect and expect capital values to fall more in the UK than in any of the other major property markets.
“If the BoE were to tighten policy more aggressively than we anticipate, it would raise the risk of an illiquidity event, with the potential for feedback to the banking sector and wider economy.”
