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Small increase to base rate may be sign of BoE running out of steam – industry reaction

  • 03/08/2023
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Small increase to base rate may be sign of BoE running out of steam – industry reaction
There were hopes that the Bank of England (BoE) would pause its base rate hike cycle today, but the modest 0.25 per cent increase may suggest the run of monetary tightening is coming to an end.

The Monetary Policy Committee (MPC) announced the base rate had been increased to 5.25 per cent with a vote of 6-3. One member wanted to hold the base rate at five per cent while two wanted to raise it to 5.5 per cent. 

The member who wanted to hold the rate said the monetary policy had become restrictive and risked overtightening. 

The 0.25 per cent hike was widely expected after inflation dropped to a better-than-expected 7.9 per cent, but some industry figures questioned whether it was the right decision. 

Samuel Mather-Holgate, financial adviser at Mather and Murray Financial said raising the base rate when the previous increases had not fully filtered through was “absolute lunacy”. 

He said: “Only one member of the MPC wanted to maintain its previous level and they should be applauded. This further rise will add misery to homeowners and those with business finance.  

“An already lifeless housing market will shrink further into itself, not to reappear until spring. The governor needs to get a grip and reverse these hikes before the end of the year.” 

Amit Patel, adviser at Trinity Finance, agreed, adding: “This is unmitigated madness. This is another nail in the coffin for millions of mortgage holders and small to medium-sized businesses that are the lifeblood of the economy.  

“Consecutive rate rises so far have not controlled inflation, which has been compounded by the energy crisis, Brexit and food prices due to poor harvests globally and greedflation by the supermarkets. Effectively, the BoE is triggering a recession, which is both reckless and irresponsible.” 

Mark Harris, chief executive of SPF Private Clients, said it would be better if the central bank halted its course of action.  

He added: “It’s time for the bank to press the pause button. Give this latest rate rise time to take effect and see how the markets react before deciding whether to continue with these rate increases. Consecutive rate rises have been painful; it’s time to let them do their job, rather than causing continued anxiety and distress for borrowers.” 

Adam Oldfield, chief revenue officer at Phoebus Software, also suggested it may have been “wiser to give the last rise more time to take effect” and said it would be interesting to see how the bank’s next forecast and review would influence the MPC’s future decisions.  

Andrew Gething, managing director of MorganAsh, said although inflation had improved, the BoE probably did not have the confidence to loosen its policy yet. 

He added: “Pressures in the labour market and with services inflation will undoubtedly remain a key consideration for the MPC moving forward.” 


Not bold enough 

Jonathan Samuels, CEO of Octane Capital, had a differing view and felt the central bank was not acting strongly enough.  

He said: “Whilst an unpopular opinion, it could be argued that the BoE hasn’t been daring enough in their decision to increase rates again today and really another 0.5 per cent increase was needed in order to tame inflation.  

“It’s far better to have a short period of pain brought about by higher interest rates, rather than a sustained period of significant economic turmoil and uncertainty.” 

Samuels referenced America and said rates there started to rise around the same time as the UK but more aggressively, and inflation in the US had already fallen to three per cent. 

“If we had been as bold, then we too would be close to achieving the much heralded ‘soft landing’ and would be far closer to interest rates falling than we are now,” Samuels said. 

This was a point supported by the two members who wanted the base rate to rise to 5.5 per cent. The minutes from the MPC’s meeting said they believed it was “important to lean more actively against inflation persistence” as this had been previously “under-predicted”. 


Limited impact on mortgage rates

While the last few base rate increases have had wide-reaching knock-on effects on mortgage pricing, it was noted that the latest change was unlikely to have a notable impact. 

Steve Seal, CEO, Bluestone Mortgages, said although many mortgage borrowers were being “squeezed to the limit”, lenders had already started to lower rates because of easing inflation. 

Richard Donnell, executive director of research at Zoopla, said it was not all “doom and gloom for the housing market” as mortgage rates seemed to be peaking and the majority of people were on fixed deals. 

Matt Thompson, head of sales at Chestertons, said the latest increase would affect homeowners on variable rates as well as overleveraged buy-to-let investors. 

He added: “Although there still is a vast number of buyers wanting to move as soon as possible, rising interest rates are forcing house hunters to be more cautious, review their financial situation and calculate a more conservative budget.  

“Whilst this has recently resulted in fewer new buyers entering the market, we expect activity to pick up again once buyers have adjusted their criteria and lenders are bringing more products to the market again.” 


Coming to the end? 

Others saw the 0.25 per cent rise as a sign of the beginning of the end. 

Giles Coghlan, chief market analyst, consulting for HYCM: “Today’s decision was a close call, with policymakers divided between a 25 basis points (bps) or 50bps rate hike. Given that the latest inflation data has shown demonstrably that the BoE’s bitter medicine is starting to work, shifting gears down to a 25bps hike was sensible.” 

He said inflation would continue to fall and “despite concerns about economic growth, today’s hike is yet another sign that the central bank’s quantitative tightening could be nearing completion, and we should see the hiking cycle soon coming to a halt, with more modest hikes in the pipeline until then”.

“Investors should expect some volatility in the aftermath of today’s decision,” Coghlan added. 

William Scoular, head of private client lending at Investec Real Estate, said the decision could indicate that the “interest rate rise juggernaut could finally be running out of steam”.  

He added: “There is growing evidence the inflation balloon is starting to deflate, as the bitter monetary pill UK consumers have had to swallow starts to take effect.” 

Brian Murphy, head of lending at Mortgage Advice Bureau, said: “Many will be hoping that we are nearing the peak of interest rate hikes.  

“Rates on fixed term products have been dropping marginally in the past few weeks, and there remains hope that they will continue to do so, despite the decision to increase overall rates for the 14th time in a row.” 

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