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In raising the interest rate from 1% to 1.25% in June 2022, the Bank of England (BoE) sent a strong signal that the era of cheap money was over.
The last time the base rate had been at even 1% was in February 2009. Since then, and until May this year, the rate had moved back and forth within a range of 0.10% to 0.75% as the Bank reacted to and tried to shepherd the country through wild economic events.
There are, conceivably, 18-year-olds out there preparing to buy their first house, although the number must surely be tiny (after all, the average age for a first-time buyer these days is the early 30s). They have never seen an interest rate above 1%.
I anticipate that the inflationary situation will last for the rest of this year and then begin to normalise
And, until Christmas last year, the highest rate of inflation they had seen occurred when they were receiving pocket money — September 2011, when it hit 5.1%. In the intervening period, inflation fell as low as negative 0.2% (in April 2015).
A quick review of the past 10 years seems worthwhile. History may not repeat itself but it’s useful to know how we got here.
Quantitative easing
By June 2012, the shock of the great recession had faded. But the impact of one of the biggest weapons rolled out to fight it — quantitative easing (QE) — is still playing out today and will likely do so for many more years.
QE saw the BoE purchase government and financial corporate bonds on a huge scale (almost £1trn worth by the end of 2020) in predictable lots. Faced with a super-low interest rate — the Bank had dropped it to 0.5% in March 2009 and it was still there in 2012 — the idea was that newly encashed firms would inject this money into a battered economy, creating growth.
The housing market is showing no signs of slowing down but these trigger-happy rate rises are enough to send shockwaves through it
History books will serve to judge the successes and failures of this policy, which ended in the UK in December 2021.
It wasn’t until August 2016 that the BoE made a change to the interest rate — entering historic territory in lowering it to 0.25% as institutions panicked over the UK’s vote to exit Europe.
The rate flitted between 0.25% and 0.75% from then on, until the deepening grip of Covid-19 forced the BoE to make the dramatic move of cutting it to 0.10%.
Climb upwards
To many people it seemed a zero interest rate policy (known as ‘Zirp’ in some circles) was going to be a fact of life. That was not the case, however. The climb upwards began in December 2021 as the nation reopened its doors. First the Bank upped rates to 0.25%; then, in February 2022, to 0.5%.
The rally to 1.25% has been similarly rapid: from 0.75% in March to 1% in May and then to today’s rate in June.
Meeting minutes published by the BoE describe a singular worry driving these increases: inflation. At the time of writing, the Bank believes it will rise from 9.1% now to 11% later this year. The last time inflation came anywhere close to this number was in March 1974, when it hit 12.9%.
If we continue to talk the market down and the BoE continues to raise interest rates for no good reason, motivation could be affected across the board
Initially, governments the world over claimed this high inflation was temporary, but now they say otherwise.
Many people in the mortgage industry believe this to be the case as well, and they foretell even higher interest rates — which of course percolate to mortgage rates. For example, Hargreaves Lansdown senior personal finance analyst Sarah Coles says the Bank rate is likely to increase further, “possibly to as much as 3% by the end of the year”.
She adds: “We may even see a 0.5 percentage point rise in August as the BoE struggles to keep a lid on inflation. It has to tread a careful line between dampening price rises and damaging growth even further, but right now, with inflation at 9.1%, it can’t sit on its hands.”
There’s every expectation that the recent base rate rises could continue as inflation continues to spike
And Anderson Harris director Adrian Anderson predicts we’ll see a base rate of “circa 2.00%-plus by the end of 2022”.
Impact on mortgages
Regarding the impact on mortgages, Anderson says: “Monetary policy is quite a blunt instrument and with so many mortgages being fixed it will take time for the effects of these rises to be felt for many homeowners.
“This may limit its effectiveness on the demand side. For example, those who fixed last year for five years won’t feel the effect on their mortgage for many years. In the past, trackers were the vogue product, so the effects were seen faster.
“This may force the Bank to go harder to get the results it is looking for.”
There was always going to be a high inflation figure as we came out of Covid, as life returns to normal and people spend their savings
Anderson says talking to clients about overpaying now, to both reduce their mortgage and get used to higher payments, may be worthwhile.
L&C associate director of communications David Hollingworth points to the make-up of the BoE votes for rising rates so far: “The Bank has lifted rates in the past five meetings and votes were split. A minority expressed a preference for a bigger increase.”
Indeed, the vote to raise the rate by 25 basis points in June was split six to three.
“There’s every expectation that the recent base rate rises could continue as inflation continues to spike,” he says.
Global tone
Over in the United States, whose monetary policy so often sets the global tone, Federal Reserve chairman Jerome Powell has hinted that another 75bp rise will occur this summer. So far this year the US has raised rates by 1.50%.
With so many mortgages being fixed it will take time for the effects of these rises to be felt for many homeowners
Hollingworth has extrapolated a 4% figure for two-year fixes by the end of 2022, based on the rise in the average of the top 10 lender remortgage fixes since the beginning of this year.
Many people Mortgage Strategy spoke to thought the recent rate rises were sensible. However, Conveyancing Foundation chairman Lloyd Davies disagreed. Calling the BoE’s tone “inflammatory nonsense”, he thought its actions would in fact push inflation higher.
Davies is of the opinion that any damage to the housing market will damage the broader UK economy. He says the housing market “is showing no signs of slowing down but these trigger-happy rate rises are enough to send shockwaves through the market and really damage consumer confidence”.
The BoE has to tread a careful line between dampening price rises and damaging growth even further, but right now, with inflation at 9.1%, it can’t sit on its hands
He continues: “If we continue to talk the market down and the BoE continues to raise interest rates for no good reason, motivation could be affected across the board.
“There was always going to be a high inflation figure as we came out of Covid, as life returns to normal and people spend their savings, and this has been exacerbated by the war in Ukraine and the resulting rise in energy prices.
“I anticipate that this inflationary situation will last for the rest of this year and then begin to normalise, without the need for undue concern,” says Davies.
Are we headed back to the 1970s? It can’t hurt to stock up on bell bottoms and tie-dyed shirts. Just in case.
This article featured in the July edition of MS.
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