- Inflation to hit 10.9 per cent
- Mortgage rates expected to level out or fall
Economists and mortgage experts are struggling to predict the impact of the Bank of England’s decision to increase interest rates by 75 bps to 3 per cent – the steepest rise in 30 years.
This has come as inflation is expected to hit 10.9 per cent at the end of the year and remain elevated for all of 2023. Alongside the rate rise, the Bank reaffirmed its commitment to “take the actions necessary to return inflation to the 2 per cent target sustainably in the medium term”, adding that “further increases in Bank Rate may be required”.
The Bank also made the more unusual move of stressing that interest rates could come to a peak “lower than priced into financial markets”- a dovish statement alongside a hawkish rate move. At the time of the Bank’s meeting, financial markets had priced in a peak interest rate of 5.25 per cent – implying a series of rate hikes totalling a further 2.25 per cent over the coming months.
Some economists also doubt that interest rates will rise as far as markets expect, but there is little consensus on how high rates will eventually go.
Capital Economics’ Senior UK economist, Ruth Gregory, argued that inflation will be “stickier than the Bank expects'', and forecasts that rates will peak at 5 per cent as a result. On the other hand, ING developed markets economist James Smith said that hiking rates to 5 per cent would go too far and see inflation fall below target by 2025. He expected the pace of hikes to slow to 50 bps in December and argues that Bank Rate is unlikely to rise above 4 per cent next year.
Things are complicated by the fact that the Bank faces significant uncertainty in the run-up to the government’s Autumn Statement. Less than two months ago, the Bank of England was caught off guard by Liz Truss’s “mini” Budget, which – released the day after September’s monetary policy decision – triggered a period of significant market turmoil.
The Bank has again found itself flying blind, with the MPC’s latest forecast stressing that it did not incorporate any of the new fiscal policies mooted for inclusion in the Autumn Statement. The 17 November statement is likely to contain significant fiscal tightening measures, which economists anticipate could total as much as £50bn by 2026/27. This would represent a considerable drag on the economy, weakening the case for further steep rate hikes.
A mortgage mellowing?
In the mortgage market, many have predicted that rates will either stay the same or even fall despite the size of the base rate hike. Some said that future rises in the base rate had already been factored into lenders’ decisions. Others argued that the Bank’s dovish tone on the eventual interest rate peak meant mortgage rates may actually decrease as lenders realise they may have overestimated where the base rate will ultimately go.
“Although the increase of interest rates to 3 per cent appears to be a big jump, banks have anticipated this market development due to the current economic climate and already factored this into their calculation,” said Matthew Thompson, head of sales at property agency Chestertons.
“As such, we don’t expect banks to increase their mortgage rates further but begin levelling out their mortgage products instead,” he added.
Simon Gammon, managing partner at Knight Frank, another property agency, said he would be "surprised if we see a meaningful rise in mortgage rates in the coming days even with such a large rise in the base rate” adding that the fact that many fixed rate products sit between 5.5 and 6 per cent is “still high when you consider the base rate is at 3 per cent”.
“Swap rates – instruments used by lenders to price mortgages – have been trending downwards. If they continue to do so, we believe that some borrowers could still enjoy fixed rate products starting with a four in the weeks ahead [...] we think there's room for more easing in mortgage rates or at the very least a plateau.”
The resulting impact on house prices from both the mortgage market and predicted base rate rises also seems to have already been factored in.
On the morning of the MPC announcement, Savills (SVS) forecast a 10 per cent plunge in house prices nationally next year – with London expected to take a 12.5 per cent hit – based on the expectation that the Bank of England would ultimately increase the base rate to 4 per cent.
Last month, Knight Frank had forecast a 10 per cent fall over the next two years and said that it was unlikely to change its forecast based on further announcements from the bank. Tom Bill, a colleague of Gammon’s at Knight Frank, told Investors Chronicle at the time: “More so than what the Bank of England does next, it’s what the government does next.”
