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BoE base rate rise expected but ‘huge disappointment to housing market’‒ analysis

  • 23/03/2023
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BoE base rate rise expected but ‘huge disappointment to housing market’‒ analysis
The Bank of England’s (BoE) decision to increase the base rate to four per cent was not seen as a surprise but could slow the fall in mortgage pricing as markets settle.

Andrew Montlake, managing director of Coreco, said that there had been “contradictory effects” over the past few days with the banking drama pushing rates down on one hand and the surprise rise in inflation pulling in the opposite direction.

“These opposing forces left the BoE with no real choice than to increase rates as expected by 0.25 per cent, with doing nothing not an option and 0.5 per cent going too far,” he added.

Montlake continued that the what happened next was “up for speculation” but the BoE should “take a proverbial time-out and give both the public and the markets time to breathe and settle”.

“A period of calm is imperative, and rate rises take time to filter through and have an effect. There is a saying I have heard recently that central banks tend to go too far and only stop when something breaks. Potentially we are at that point now,” he added.

He noted that rates will fall but that point had not arrived yet and “will not be as quickly or as far as many hope”.

“This rollercoaster of ups and downs could continue for some time yet, with four per cent being a consistent average as it always traditionally was, with those waiting for big falls likely to be disappointed,” Montlake said.

Rob Clifford, chief executive of Stonebridge, agreed that the base rate rise today was a “racing certainty”.

He continued that the markets had already been reacting to the news with swap rates increasing and by this morning some the “rate rise already seemed priced in”

Clifford said that borrowers on trackers would feel the impact immediately but some lenders had been cutting fixed rates, and in the “search for business”, especially from high street lenders, would “continue to keep mortgage rates round about where they are”.

He noted that this made it “even more attractive and indeed necessary for consumers to seek expert mortgage advice and mortgage advisers come into their own when lending criteria and product pricing are more complicated than usual”.


Lenders kept mortgage rates ‘largely flat’

Matt Smith, Rightmove’s Mortgage expert, said that during this period of uncertainty, lenders had “largely kept mortgage rates flat” while they waited for the outcome of the Spring Budget, inflation and base rate decision.

“This means that current mortgage rates already factor in a rate rise in March, so we won’t necessarily see mortgage rates increase following today’s decision,” he noted.

Smith continued that the fact that the rate rise was lower than previously, plus the long-term indication that inflation would fall sharply over the year, should “give lenders more confidence to start to edge down their rates”.

“Lenders will wait to see how markets respond to the Bank’s rate rise announcement before they reprice their deals,” he added.

Figures from Moneyfacts show that the standard variable rate (SVR) is 7.12 per cent, up from 4.41 per cent last year. This is the first time the SVR has breached seven per cent since 2008.

Two-year fixed rates stand at 5.32 per cent and five-year fixed rates at five per cent. This is a fall from the February of 5.44 per cent and 5.2 per cent respectively.

Brian Murphy, head of lending at Mortgage Advice Bureau said, that for the 400,000 fixed deals due to expire in Q2, this would be “good news” as rates on two and five-year fixes continue to fall and have reached a six-month low.

He added that whilst this could feel like a “double whammy” for those on variable rates as the cost of living continues to climb along with mortgage rates, there was “some light at the end of the tunnel”.

“It looks like we’re fast approaching the summit of the interest rate hikes, and there are hopes that the cost of borrowing will start to decrease,” Murphy noted.


Inflation trajectory will dictate mortgage pricing

Clifford said that it may “already seem like a long way” from the Office for Budget Responsibility’s (OBR) forecast of 2.9 per cent inflation by the end of the year.

“We will need to see some sharp falls in inflation in the months ahead, before there is any thought of base rate being cut,” he added.

Tomer Aboody, director of property lender MT Finance, agreed, adding that the government’s target of halving inflation by the end of the year may look “slightly optimistic” but it was believed that the “right course of action is being adopted in the background”.

“There are concerns that further rate rises could result in further issues for the banks, but let’s hope there is enough stability to counter that risk and that this rise is the penultimate, if not the last, before the BoE can start reducing base rate,” Aboody noted.


Base rate rise ‘huge disappointment to housing market’

John Philips, operations director at Just Mortgages, said that the latest rise may feel like a “step in the wrong direction for the mortgage market” but it is “widely accepted to be a necessary step in the battle to curb inflation”.

“Although the base rate has gone up we have seen mortgage prices falling in recent months and customer enquiries to our brokers across the country have been remarkably robust since the start of the year.

“The advantage of yet another rate rise is that nobody should be caught off-guard and I think that brokers are doing a tremendous job in managing the expectations of clients and finding them the right deal,” he added.

Jeremy Leaf, north London estate agent and a former RICS residential chairman, said the latest rise was a “huge disappointment for the housing market as we were hoping the BoE would trust in its own data and leave well alone”.

“Activity is slowly beginning to pick up after a very quiet last quarter of 2022 and the housing market is so important to overall economic prosperity.

“Of course, it is important to reduce inflation as far as possible in view of its impact on buyer confidence to take on debt. Overall, the economy still feels fairly weak as real incomes are falling so, we would have liked to have seen at least one month without a rate rise,” he added.

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