Base rate cut still on the cards despite MPC vote split – reaction
The base rate was held at 5.25 per cent for the fourth month in a row, a decision made on a 6-3 vote.
Two of the MPC’s members wanted the base rate to rise to 5.5 per cent, while one voted for a cut to five per cent. This decision was made along with the news that the MPC expected inflation to reach the two per cent target in Q2, before rising again in Q3.
Not the right time for a rate cut
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the MPC’s inaction was not surprising, given the rise in inflation in December.
She said: “It hardly set the stage for an interest rate cut.”
Streeter suggested that a base rate reduction could still be on the way, but that “they’ll take a bit more time to flush out”.
She added: “The Bank of England didn’t waver from the line that monetary policy would have to ‘remain restrictive’ for ‘an extended period of time’ until inflation is ‘sustainably’ at two per cent.
“Much of the broader economic picture adds weight to the argument for cuts. Growth has been stagnant, and it’s likely the economy tipped into a very mild recession at the end of 2023, with companies and consumers showing a lot more caution in their spending patterns.”
Streeter said: “The Bank’s policymakers are highly unlikely to make a move before the March Budget, given that voter sweeteners like tax cuts and duty freezes could see demand in the economy tick up. The impact of delays to imported goods re-routed from the Red Sea is still uncertain, and could tip some prices upwards.”
Max Shepherd, group economist at Yorkshire Building Society, said: “For the time being, the fear of reigniting inflation is outweighing the need to stimulate economic growth. There’s also the potential for inflationary pressure from the March Budget and ongoing tensions in the Red Sea.”
Karl Wilkinson, CEO at Access Financial Services, noted that the base rate decision was only made by a majority of three votes, “so opinion is still divided on what’s best moving forward”.
He added: “I don’t think anyone will be surprised if we stick at 5.25 per cent until the summer. Hopefully then inflation will have calmed, and we can see a lower base rate.”
Mark Harris, chief executive of SPF Private Clients, said: “We expect base rate to be at four per cent or even less by the end of the year, assuming inflation also continues to move towards its two per cent target. This would necessitate around three or four interest rate cuts, which would come as welcome news for borrowers struggling with affordability.”
What next for mortgage pricing?
There seemed to be a mixed view on what the latest decision might mean for mortgage rates. Although lenders are said to have already priced in a reduction, recent rising swap rates have resulted in some increases.
Kevin Roberts, managing director of Legal and General Mortgage Services, said: “Swap rates have ticked back up from the falls we saw towards the end of last year as markets have realised that inflation may be more sticky than expected and that the space for cuts to the Bank of England base rate might be fewer and later than hoped.
“The road ahead for mortgage pricing is therefore uncertain. Lenders remain keen for business and their pricing reflects this, but even small changes in swap rates are prompting different reactions from lenders across the market. The era of ultra-low interest rates that extended over the past decade looks to be over for the foreseeable future, and we may now be settling into a new, albeit bumpy normal.”
Rob Clifford, chief executive of Stonebridge, said that with the last inflation data, the central bank had “likely opted to keep a watchful eye on the next set of figures rather than move too soon”.
He added: “While swaps have moved back up in the last week or so, the money markets still anticipate the Bank reducing rates throughout the year, with many economists forecasting at least two quarter-point cuts at some point. As the year progresses – and specifically if inflation falls further – there will be growing pressure to bring down rates, especially the closer it gets to its two per cent target.
“Mortgage lenders spent the first half of January following each other in repeatedly cutting rates; however, this has slowed recently, and today’s decision – and the rise with swaps – will mean we see a more consistent and static mortgage rate environment in the weeks ahead.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, added that the “rapid falls” in mortgage rates had slowed down following a revision of market expectations.
She added: “The path is still downhill, and we expect cuts to keep coming, but lenders are pausing for breath. It means anyone holding out for significant falls before they buy may have a longer wait than they were expecting. For those with a looming remortgage, it means they may have a bigger mountain to climb in affording their new deal.”
Still a challenge for some
Reiterating Coles’ views, Simon Webb, managing director of capital markets and finance at LiveMore, said the base rate decision was “not great news for people on standard variable rates who were hoping for a drop in interest rates. It’s particularly tough on older generations and mortgage prisoners struggling to meet their mortgage payments.”
Paul Glynn, CEO of Air, agreed, adding: “Whilst this is great news for those borrowers who are still working, for those in or approaching retirement there are wider considerations at play.
“The cost-of-living crisis and affordability issues are still causing financial stress for many individuals on a fixed income. Rate stability is a positive thing, but it must be matched by suitable products tailored for the older generation. Advisers should be prepared to have comprehensive conversations with their customers in order to find a solution that works for them, whether that is a traditional mortgage or otherwise.”
Bank of England reform needed after inflation errors, Lords say
The Economic Affairs Committee published a report ‘Making an independent Bank of England work better’, which said the independence of the central bank should be “preserved” but changes were needed.
The committee recommended that the BoE do more to “foster a diversity of views” and create a culture that “encourages challenge”.
The report said throughout 2020 and 2021, the central bank unanimously said above-target inflation was “transitionary” and was expected to come down after the pandemic. The committee concluded that this view was not challenged, at least publicly.
It added that the central bank should be “cautious” of prolonged loose monetary policy during periods of low inflation.
Some witnesses to the report suggested reviewing the inflation target, which is set by the Treasury.
It also questioned the forecast modelling used by the central bank and its reliance on this particularly during the pandemic, saying that its outlooks “seldom predict anything other than a return to the two per cent target over their forecast horizon”.
The BoE remit
The Lords also said the Treasury should scale back the central bank’s remit, so it is focused on tackling inflation and ensuring financial stability. It said its expanded remit risked “drawing the bank into the government’s wider policy agenda”.
The committee said while quantitative easing was a “powerful tool” in the aftermath of the 2008 financial crisis, its continued use “has blurred the lines between monetary policy and fiscal policy.”
It was proposed that Parliament conduct a review of the BoE’s remit and operations every five years, as well as enhance Parliament’s ability to hold the bank to account.
Lord Bridges of Headley, chair of the House of Lords Economic Affairs Committee, said: “25 years after the Bank of England was made operationally independent, it is time to take stock. While we are of the strong view that independence should be preserved, reforms are needed to improve the bank’s performance and to strengthen its accountability to Parliament.
“The bank should learn from the errors it made – along with other central banks – in the conduct of monetary policy during the recent period of higher inflation. But that alone is not enough. The Treasury must prune the bank’s expanded remit so the Bank can focus on controlling inflation and maintaining financial stability.”
He added: “Given the powers that unelected Bank officials wield, Parliament should conduct a review of the bank’s remit, performance and operations every five years. Independence and accountability should go hand in hand. At the moment, we are suffering from a democratic deficit.”
The state of the base rate: a balancing act for the UK economy – Akram
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.
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.
Mortgage rates predicted to drop after Bailey’s claim of base rate peak
Andrew Bailey appeared in front of the Treasury Select Committee yesterday and was asked if the central bank being slow to raise the base rate meant there was no time to pause and see the effect on the economy.
He said “we are much nearer now to the top of the cycle” but insisted he was not saying the base rate was “at the top of the cycle” because the Monetary Policy Committee (MPC) still had a meeting to come.
“We are much nearer to it on interest rates, on the basis of current evidence.”
He added that his response was “not a comment on what we’re doing at the next meeting”. The MPC will be announcing its decision on the base rate on 21 September.
Falling mortgage rates
Mortgage advisers said the governor’s comments would result in reductions to mortgage rates, which have already been falling due to a drop in swap pricing.
Riz Malik, founder and director at R3 Mortgages, said the comments “were a surprise” and predicted that any subsequent rate reductions would be “small and often”.
He added: “I am expecting more high street lenders to reprice within the next week, with criteria expansion as well. Given there are a large number of maturities within the next six months, this will be positive news for borrowers. The chances of the Monetary Policy Committee going back on the Christmas card list are increasing.”
Peter Stamford, director and lead adviser at Moor Mortgages, also said the remarks made by Bailey were unexpected.
“They signal a potential good spell for borrowers on the horizon. As we near the next base rate decision, I’m bracing for a series of modest yet frequent rate cuts from high street lenders, who seem keen to expand their criteria and snatch a larger market share amid the dwindling demand for property,” he added.
The end is in sight
Graham Cox, founder at Self Employed Mortgage Hub, said both Bailey and Chancellor Jeremy Hunt were making “positive noises about inflation” so he saw the potential for no increase to the base rate later this month.
“If there is, it could well be the last,” He added.
Cox said: “Whilst we wait with bated breath, I suspect UK mortgage rates will continue to drop, as demand has decreased sharply over the past couple of months and lenders will be getting twitchy about transaction volumes.”
Charles Breen, founder and director at Montgomery Financial, added: “I think that rates will increase again at the next Monetary Policy Committee meeting and then we will have a period of stability for circa six months. Hopefully, the latter half of 2024 we will see rates decreasing. It is all dependent on inflation and if that keeps trending down.”
UK house prices and transactions to remain weak if rates stay above five per cent – Bloomberg Intelligence
In its UK Housing Pulse report for July, Bloomberg Intelligence (BI) said the higher average mortgage rates had threatened the sales and profit of housebuilders Persimmon, Barratt, Taylor Wimpey, Bellway and Berkeley.
In the most recent trading updates and results, Taylor Wimpey said increased mortgage rates had impacted the affordability of its customers, while Bellway said first-time buyers were affected by more costly high loan to value (LTV) options.
BI said although the market rebounded following the mini Budget, the sharp increase in mortgage rates had affected sentiment towards UK housing.
BI added: “Though surging rates may add urgency for buyers who have already secured a more attractive mortgage offer, other house hunters may delay purchases until rates fall and housing market headwinds ease. Such a rapid jump in rates may have particularly hit homebuyers heavily reliant on debt.”
Market relief on the way
However, Bloomberg Intelligence said the “modest decline” in mortgage rates which had been seen in recent weeks could “offer some respite” to the market.
The firm suggested that the market’s prediction for the base rate peak had lowered from around 6.4 per cent in June to 5.7 per cent more recently, which could go some way to lessening the impact of high interest rates on the housing market.
The firm said if inflation continued to ease more notably, then these expectations could go even lower and provide more confidence.
Iwona Hovenko, real estate analyst at Bloomberg Intelligence, said: “Tentative signs of easing cost pressures, with inflation slowing more than anticipated and the labour market also softening – as unemployment unexpectedly increased in June – could support some pull-back in rate views, in turn driving mortgage rates lower.
“This may, however, require several months of consistently slowing inflation and wage pressure. Despite recent news of mortgage rate cuts by lenders, financing costs remain high and still pose a significant risk to housing activity and prices.”
Average mortgage rates drop marginally as market steadies – Rightmove
The Rightmove weekly mortgage tracker showed the average rate for a two-year fixed mortgage at 60 per cent loan to value (LTV) was 6.24 per cent today, down from 6.3 per cent as of 1 August. A five-year fix at the same tier had an average rate of 5.77 per cent, down from 5.82 per cent last week.
At 75 per cent LTV, the average two-year fixed rate is 6.42 per cent, slightly lower than 6.47 per cent a week ago. The five-year fixed alternative is priced at 5.98 per cent, the same as the average last week.
For a deal at 85 per cent LTV, a two-year fix is priced at 6.61 per cent, while a five-year fix is 6.14 per cent. These were small drops from 6.65 per cent and 6.15 per cent respectively.
A two-year fix at 90 per cent LTV had a rate of 6.74 per cent on average, which was down from 6.77 per cent last week. For a five-year fix at the same tier, the average rate had fallen from 6.18 per cent to 6.16 per cent.
At 95 per cent LTV, the average rate for a two-year fix was 6.94 per cent, unchanged from the previous week.
Meanwhile, the average five-year fixed rate for small deposit borrowers decreased from 6.26 per cent to 6.24 per cent.
Hope for a period of stability
Matt Smith, mortgage expert at Rightmove, said: “The market has remained relatively calm since the base rate increase, and those looking to take out a mortgage soon will be hoping this period of some stability continues for as long as possible. As expected, despite the base rate rise, fixed rate mortgage deals have continued to tentatively trend downwards and based on the latest swap rates, are likely to continue to do so slowly, barring any market surprises.
“A settled market provides more confidence and certainty, and next week’s inflation data will be key to setting the tone for the following weeks. If some positive news means confidence can continue to build, lenders may feel they can get more competitive with their rates to attract the many motivated buyers still in the market to move.”
A moment of base rate calm will soothe the mortgage market frenzy – JLM
July was supposed to be something of a ‘respite’ month with no Bank of England Monetary Policy Committee (MPC) meeting taking place. However, the ‘noise’ around the sector, and the movements we continued to see in swaps, mean the sense of urgency and volatility is perhaps as high as it has been, certainly since the post-mini Budget fallout.
For advisers, there is a difficult line to tread here, not least because at the end of this month, firms must be Consumer Duty-ready.
We know a lot of resource, energy and cost is being drawn into doing this. However, the market is constantly shifting, with lenders continuing to withdraw products and rates at late notice, which is adding not just to advisory workloads, but also those within lenders themselves.
As we write, there is no doubt that many lenders are eyeing up what is happening to swaps right now and determining where they go from here – undoubtedly up in terms of rates – plus one wonders what the recent meetings between the lending community and Chancellor in terms of the apparent disconnect between savings and mortgage rates, is likely to do to pricing.
Whatever it is, it’s not pretty, however, our fate may effectively be sealed by the next set of inflation figures and their direction of travel. To say that we will be watching the next set of data – due on the 19 July – with some interest, is again a huge understatement. Although, you do wonder if further rate rises are already baked in regardless of what they reveal.
Getting to grips with the market
If this all feels rather chaotic at the moment, then that’s exactly what it feels like to many of the mortgage clients we talk to. Of course, part of our job as advisers is making sense of the market and finding them the most suitable deal for their circumstances in this market.
We can’t predict what will happen next and shouldn’t think we need to.
Indeed, while inflation is the overriding focus for the Bank of England and the government right now, we also can’t help feeling that a set of inflation figures which show any sort of fall may present the Bank with an opportunity to press the pause button when it comes to the MPC’s next meeting and its decision on bank base rate (BBR).
Much like the Fed did recently, if inflation – and importantly, core inflation – is shown to have fallen month-on-month, then the Bank could decide not to increase BBR at all, perhaps citing these figures as an example that rises over the last year or so are starting to work.
A pause on rate rises?
There is an argument to suggest that after missing a trick by not raising quickly enough at the start of this inflationary period, it might overegg the pudding by raising too much without allowing those other rises to have an impact. Especially, given our rate environment now is so different from what the UK public have become accustomed to over the last decade or so.
This could be a ‘common sense’ approach. Not suggesting that further rate rises won’t be coming during the rest of 2023 but opting for a ‘wait and see’ attitude at least for a month or two, to see whether the anticipated drops in inflation do start to materialise.
Now, of course, whether the Bank MPC members believe this is the right route to take is another matter entirely. In the meantime, we’ll continue to have predictions of a 6.25 per cent BBR by the end of the year, and we’ll see headlines referring to seven per cent mortgage rates over the same timescale.
Hardly likely to engender any type of confidence from either existing borrowers or those still looking to get on the ladder.
This feels like a really pivotal moment for the mortgage market, not just in the context of the here and now but also for the rest of the year and into 2024. Lest we forget that many existing borrowers due to come to the end of their deals in six months’ time are being advised now on what is achievable, and will be being presented with product transfer offers by their lenders in the weeks ahead.
As advisers, that fact is not being lost on any of us. It would be nice to think we have people in charge who are also taking this into account.
Bank rate jumps 50bps as inflation holds firm – Maddox
This was a higher increase than expected by most economists, which exposed a lack of understanding among markets of the BoE’s outlook. The decision was approved by a majority of seven to two, with the minority, in stark contrast, preferring to maintain the rate at 4.5 per cent. The MPC said that further rate rises could be necessary to bring inflation back under control.
This is the 13th consecutive hike to the base rate, which has risen from 0.1 per cent in December 2021, and is the highest rate in 15 years. Due to persistent high inflation, the market is pricing in further hikes this year, with a likely 25bps hike in August and a projected terminal rate of 5.75 per cent in November, up from five per cent previously. Nevertheless, further data surprises on inflation could lead to another 50bps hike in August.
The latest UK inflation data for the 12 months to May was flat from April figures at 8.7 per cent, with overall inflation falling at a far slower rate than anticipated. Services inflation jumped 0.5 per cent in May to 7.4 per cent with airfares and package holidays contributing to the increase. Core goods price inflation was much stronger than anticipated, although this is expected to decrease as supply chain costs fall over the course of the year. Similarly, food price inflation has started to decline and is expected to drop further in Q2 of this year. Wage inflation and a tight labour market are also having a significant impact on the results.
In the MPC’s latest Market Participants Survey, predictions are that inflation will decline to just over 2.2 per cent in three years’ time.
UK GDP for Q2 of this year is expected to be moderately stronger than previously predicted, following a slightly weaker than anticipated Q1 result, with current estimates expecting growth of 0.1 per cent. Taking a broader view, UK GDP is predicted to increase around 0.25 per cent in 2023.
Due to the sharp rise in rates, new mortgage rates have rocketed with high street lenders offering an average 75 per cent loan to value (LTV), two-year fixed rate product from 5.6 per cent, and similar five-year fixed product from 5.1 per cent (all rates are dependent on LTV and product fees). Due to the latest hike from the BoE, we expect these rates to increase further.
The UK labour market continues to be very tight, with the unemployment rate remaining broadly flat at 3.8 per cent in the three months to April.
The number of people in employment increased to a record high in the latest quarter with increases in both the number of employees and self-employed workers. Labour demand has continued to ease with the number of vacancies falling over the quarter for the 11th consecutive period. Growth in regular pay, not including bonuses, was up by 7.2 per cent in the three months to April. Although this is a 1.3 per cent decline once adjusted for inflation, it is the largest growth rate seen outside of the coronavirus pandemic.
|Forecast in rates
|One month time
|Three months’ time
|Six months’ time
|12 months’ time
|Two years’ time
|Three years time
|Bank of England Base Rate*
|5.00 per cent
|5.53 per cent
|5.91 per cent
|5.69 per cent
|4.76 per cent
|4.25 per cent
|Two-year fixed rate**
|5.55 per cent
|5.53 per cent
|5.41 per cent
|5.12 per cent
|4.50 per cent
|4.06 per cent
|Three-year fixed rate**
|5.28 per cent
|5.23 per cent
|5.11 per cent
|4.83 per cent
|4.29 per cent
|3.91 per cent
|Five-year fixed rate**
|4.78 per cent
|4.73 per cent
|4.63 per cent
|4.40 per cent
|4.00 per cent
|3.74 per cent
|10-year fixed rate**
|4.15 per cent
|4.13 per cent
|4.08 per cent
|3.96 per cent
|3.78 per cent
|3.67 per cent
* Using OIS Curve
**Based on the swap curve
The two-year swap rate is expected to slowly decline over the next three years, with three and five-year swap rates predicted to follow the same pattern. All are falling at a far slower pace than previously thought.
The curve has steepened slightly with the 10-year swap rate anticipated to stay relatively flat over the next year, decreasing by 48bps over the next three years.
UK securitisation market
The UK securitisation market has been quieter over the last few weeks in the lead up to the Global ABS conference, with the majority of the market attending last week. The conference was the busiest yet with over 5,000 market participants attending. The key concern of market participants is the potential for deterioration of credit performance. On the back of the positive general mood of the conference, two transactions decided to access the market this week, an owner-occupied only first lien transaction from Paratus (Foundation Home Loans) and a mixed owner-occupied and buy to let transaction of first lien loans from Together.
This year so far, there has been just over £8bn of UK residential mortgage-backed securitisation (RMBS) paper placed into the market compared to approximately £16bn at this time last year, although circa £10bn of that was legacy paper. Due to wider market spreads, we have seen more prime issuances than specialist so far this year and only 40 per cent of the specialist volumes we saw at this time last year.
Borrowers should prepare for more base rate hikes – industry reaction
Today, the Monetary Policy Committee (MPC) announced its decision to increase the base rate to five per cent, up from 4.5 per cent. This was the 13th hike in a row.
The decision was made in a seven to two majority, with Swati Dhingra and Silvana Tenreyro being the only committee members to vote to hold the rate at 4.5 per cent.
Professionals in the financial and property markets said borrowers would need to plan ahead to make sure they were financially ready for costs to rise.
Borrowers’ ability to adjust
Will Hale, CEO of Key, said borrowers should not bury their heads in the sand and rely on rates falling any time soon.
He added: “Instead, they need to proactively consider all their options and speak to a mortgage adviser now who will be able to help them to make the right choice for their individual circumstances.”
Garry White, chief investment commentator at Charles Stanley, said: “Mortgage holders need to prepare for more pain ahead, as persistently high inflation means even more interest rate rises are likely in the coming months.
“Markets are now pricing in interest rates hitting six per cent by the end of the year, though this could be an overly hawkish stance. Rising mortgage rates, coupled with continuing price rises in goods and services, will act as a sharp brake on the UK economy, as households rein in spending. The impact of the mortgage squeeze on consumer incomes will lead to the underperformance of UK growth compared to the more favourable GDP growth forecasts that have emerged.”
Ben Woolman, director at Woolbro Group, said it was naïve to think that homeowners would just keep adjusting to higher rates.
He added: “Mortgagors are instead having to come to terms with the life-changing consequences of this latest rate rise which, for many, will be devastating.”
Woolman said this “turmoil” was years in the making as the “ineffective planning system” limited new development.
“If there was ever a time for the Prime Minister to publicly commit to reform of Britain’s outdated and ineffective planning system, it is now.
“Planning reform is the only long-term solution to Britain’s housing crisis. By bringing the supply of new homes in line with demand, we can eventually make homeownership a reality for those who today are completely priced out of the market,” he added.
Shock after prolonged low rates
Some professionals said people became too comfortable and complacent because rates were so low for so long.
Ross Boyd, founder and CEO of Dashly, said: “The consequence of a decade-long reliance on artificially low interest rates is now quickly unravelling. Alarming UK inflation figures sent shockwaves through the mortgage market, exposing the ineffectiveness of the Bank of England’s interest rate rises. This inflation surge stems from supply-side issues, not demand-side factors and a cold turkey approach could have disastrous effects.
“Merely curbing spending power will not miraculously impact shelf prices. It is high time for the Government and the Bank of England to pause, re-evaluate their strategies, and acknowledge the potential point of no return.”
Simon Webb, managing director of capital markets and finance at LiveMore, said the Bank of England initially promised that any rate increases following 13 years of low rates would be a “slow process” but added: “The opposite has happened.”
He said: “The unprecedented 13th consecutive rise in the base rate in 18 months, with further rises anticipated, is a price Chancellor Jeremy Hunt is willing to pay as bringing down inflation is the government’s ultimate goal.
“This latest rise is likely to be reflected in swap rates, which have almost doubled in the past year and therefore fixed rate mortgages will continue to be more expensive.”
Adam Oldfield, chief revenue officer at Phoebus Software, agreed, adding: “The fact that we have been living in an artificially low interest environment for so long means that, perhaps, some borrowers became complacent. Now the increase to their mortgage payments has come as a massive shock.
“Nonetheless, paying the mortgage is not optional and as such borrowers are going to need to adjust to this new environment, the new normal.”
Not fully expected
While the markets did widely predict a 0.25 per cent rise in the base rate, some industry professionals said the Bank of England should have considered taking a break from successive increases like other central banks.
Mark Harris, chief executive of SPF Private Clients, said the central bank should “hit the pause button”.
He said: “There is a strong argument for pausing rate rises for now, giving the market time to settle down and adjust.
“Consecutive base rate rises have been painful and done little to stem inflation which is proving to be worryingly stubborn; it’s time for a different approach, letting the impact of the rate rises so far take effect, rather than causing continued anxiety and distress for borrowers.”
Nitesh Patel, strategic economist at Yorkshire Building Society, said despite this being the 13th increase to the base rate, the reality of the rises were “yet to be felt”.
Gary Smith, partner in financial planning at Evelyn Partners, said there could be more “mortgage market mayhem” as many lenders had only priced in a 25 basis point move.
He said: “With the benchmark interest rate undergoing a step-change to a level not seen since September 2008, the coming weeks are likely to see a procession of raised loan rates – and a succession of eye-watering estimates of how much monthly and annual loan payments will increase as borrowers come off their cheap fixed deals.”
Ben Allkins, head of mortgages and protection at Just Mortgages said: “Many would have hoped that the MPC would follow the Federal Reserve – as it often does – and pause its rate rising agenda.
“But while the Fed pauses to assess the impact of existing increases, the same cannot be said for the Bank of England with stubborn inflation clearly proving too much of a threat to not raise base rate once again.”
Searches for mortgages ‘surge’ on Twenty7tec after interest rate hikes
The company revealed that mortgage searches were usually 8.89 per cent higher on the day of the rate hike in comparison to the day before.
Average daily searches prior to and after the decision are flat, with 67,501 the day before and 67,756 the day after. On the day that the Bank of England announces its decision, this increases to 73,575.
Remortgage searches rise by 12.6 per cent in the week after the rate decision compared to the week before. The long-term average for remortgage searches has been 29,115 since 1 January 2022. On decision day, this increases by 14.23 per cent to 33,259.
The average daily buy-to-let search figure since 1 January 2022 is 9,252, but rises to 14,980 on decision day.
Nathan Reilly, director of customer relationships at Twenty7tec, said: “We’ve run the stats and have seen that there’s a 10 per cent hike in mortgage search activity the week after the announcement compared to the week before.
“If the market has called it right, mortgage advisers are going to be busier than usual from Friday. And lenders will, of course, be busy thinking about how to modify products. The vast majority of lenders now make adjustments within the first 24 hours of a rate rise. Our team will be working hard to ensure that advisers and house buyers get the very best information as soon as we hear from the Bank of England.”