By Today (2 February 2023) the Bank of England’s (BoE) Monetary Policy Committee (MPC) again took the decision to increase the UK base rate, the 10th consecutive increase in a row.
This increase brings the new base rate to 4%, an increase of 0.5%.
The rate now sits at the highest rate it’s been since autumn 2008.
Some economists believe that, despite a recent fall in inflation, additional increases in the base rate may be necessary to accomplish the MPC’s inflation target of 2%.
The next decision will be made on 23rd March.
Marcus Dixon, Director of UK residential research at JLL comments:
“Despite not all of the nine members of the Monetary Policy Committee being in agreement on rising rates in February, few would have said the further 50 basis point increase to 4.0% was a surprise.
Yes, inflation looks to have topped out, but monthly falls in the rate are marginal and annual inflation remains in double digits.
This base rate rise, the tenth consecutive increase, will add further monthly costs for those households on variable rates as well as those reaching the end of their current fix.
Rates paid will be higher, but we continue to see fixed rates fall from their post mini-budget highs, with a handful of sub 4% rates now creeping into the market.
This would suggest that banks expect further rises in the base rate in 2023 will be minimal, in line with expectations of rates topping out this year at 4.5% or lower.
Yet even at sub 4% mortgage rates are considerably higher than those we have become accustomed to in recent years.
This will, we expect, mean fewer moves in 2023, with transactions levels forecasts to fall by 30% on 2022 levels this year.
But within the Bank’s statement there was some encouraging news on the outlook for inflation, with expectations that annual inflation (CPI) would fall to 3.9% in a years time, lower than previously forecast.”
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, comments:
“It’s pretty apt that its Groundhog Day given Bank of England policymakers are on stuck on repeat.
They are trying to bring down still-hot inflation, while not tipping the economy into a more punishing downturn by raising interest rates yet again.
The 0.5% hike was widely expected because, although energy bills have made a sharp retreat, the fight for talent shows little sign of cooling off and wages are staying particularly stubborn.
The pound fell after the announcement as markets digest the latest monetary policy decision.
There is deviation from previous scripts, which painted a picture of a long and deep recession.
In these minutes a brighter outlook has emerged, with unemployment not rising so high, and the economic contraction set to be milder.
It’s a ray of light in an otherwise gloomy week with Britain’s laggard status among the G7 being confirmed by the IMF. But pessimism does look set to seep away.
Companies appear to be peering through the current gloom at rays of sunshine on the horizon with optimism about the year ahead.
The most recent PMI snapshot showed business activity climbing further from October lows and the Lloyds Bank Business Barometer out earlier this week showed pessimism was ebbing away.
Just as Bill Murray finally jolted his daily grind out of repeat, Andrew Baily’s own Groundhog Day film may be coming to an end.
The economy may ring one last alarm in the weeks to come, jolting policymakers into making a further rate rise, but the story in the back half of the year is set to move to a guessing game of rate cuts, as deflationary forces accelerate.”
Simon Gammon, Managing Partner at Knight Frank Finance, said:
“Today’s hike was baked into fixed rate mortgages, so we don’t expect much movement during the days ahead.
Fixed rate mortgages are now as cheap as they are going to be for some time, or at the very least are close to bottoming out.
While rates are significantly higher than they were twelve months ago, buyers are adjusting to the ‘new normal’ and activity levels have recovered during the relative stability of January.
Before Thursday’s decision, the best five year fixed products could be found as low as 4.19%, while the best trackers sat at around 3.94%.
Tracker rates will now rise and we now expect many five year fixed rate products to be cheaper than tracker products for the first time since the mini-budget.
Many buyers have been waiting on penalty-free tracker products for fixed rates to fall. This could be the moment that we see large numbers opt to switch to fixed products, because it’s unlikely that we’ll see rates fall much further.”
Tom Bill, head of UK residential research at Knight Frank, said:
“The size and direction of the bank rate movement is now less relevant for house buyers than the fact there is stability in the mortgage market.
Fixed rates are edging down steadily but not significantly following the mini-Budget as the peak for borrowing costs gets nearer.
Buyers and sellers switched off long before Christmas last year due to the volatility caused by the mini-Budget, but activity has recovered in 2023.
Most buyers are needs-driven and have accepted the new normal for mortgage rates, which is supporting demand.
The less negative message from the Bank of England on the prospects for the UK economy will help sentiment.
The resilience of prices and sales volumes will be put to the test in the spring when larger numbers of transactions take place and by which time virtually no five-year fixed-rate mortgages below 4% will remain in the system. We expect prices to decline by 10% over the next two years as budgets get recalculated.
A strong labour market, relatively low supply, and the fact more homes have been owned outright than with a mortgage in England since 2013 will keep upwards pressure on prices.”
Jeremy Leaf, north London estate agent and a former RICS residential chairman, comments:
“The effects of the Bank of England’s base rate decision have seemingly been discounted by many homebuyers and sellers who are on fixed-rate deals which don’t expire for some time yet.
But don’t get me wrong, those directly impacted by the change will know all about it in their repayments.
The impact on house prices has been a reminder that negotiations can be tough if transactions are to happen as prospects are not exactly rosy.
While another base-rate rise is unwelcome, more attention is being focused on two- and five-year fixed-rate mortgages, which thankfully have started to fall.
This will bring much-needed stability and confidence to take on debt, despite continuing worries about the economy.”
Tomer Aboody, director of property lender MT Finance, comments:
“Borrowers will be hoping that this latest rate rise will be one of the last to come in quick succession.
With Rishi Sunak’s government pushing to halve inflation by the end of the year, it is not unreasonable to question whether there could be an even bigger stimulus for the property market in the form of a possible reduction in interest rates from next year.
One thing’s for sure, consumers are already preparing for more tough times ahead while they wait for some relief from aggressive rate rises.”
CEO of RIFT Tax Refunds, Bradley Post, comments:
“A further squeezing of borrowing costs will not help the cost of living crisis one jot.
Together with the highest tax burden in decades the hard-working public could be forgiven for believing that the powers-that-be do not exactly have their back, so to speak.
It’s a debatable point, however in order to avoid a full-blown recession the government needs to now look at mitigating taxation for individuals and for businesses, starting with a reduction in corporation tax to help small businesses invest and expand so that their workforce can thrive too.
Growing our economy is crucial at this time and taxing it until the pips squeak is not conducive with that.”
On whether you should fix your mortgage rate now, mortgage expert, Kellie Steed at Uswitch.com comments:
“It may be worthwhile looking at fixed-rate options if you’re close to the end of your deal -or on an SVR.
Whilst certainly not as attractive as they’ve been in recent years, at the current time, both two and five-year fixes are likely to be cheaper than staying on the lender’s SVR and potentially a discount rate, depending on the size of the discount.
There has been a gradual reduction in two and five-year fixed rates throughout December 2022 and January 2023, however, it’s important to remember that the most attractive rates are only available to those with a substantial deposit or equity and a good credit rating.
Those coming out of previous two, three and five years fixed-rate deals will still almost certainly see a rise in the rates available to them when remortgaging, albeit potentially a smaller rise than they would have seen if they had remortgaged back in November 2022.
If you’re within the last six months of any type of mortgage deal at the moment, it’s absolutely worth speaking to a broker to look at the potential fixed-rate options available to you through a remortgage.
It’s by no means a highly competitive market at the moment, and there is not much wiggle room with rates, but there are savings to be made in some circumstances, so it’s definitely worth reviewing the options available to you.
It’s possible to lock in a deal with most lenders up to six months before your existing deal ends, so it’s certainly worth locking in at the best rate available now – especially given the average length of a deal is now just 15 days in January 2023.
If the pattern of falling fixed-rate deals continues, you can always opt for a better deal before your existing deal ends, should you find one.”
Managing Director of House Buyer Bureau, Chris Hodgkinson, comments:
“This latest rise in bank rates may well be the last as inflation is said by many economists to have peaked.
This will be welcome respite for homeowners with a variable rate mortgage in particular and notwithstanding that some 70% of mortgage holders are on fixed rates in any case and remain somewhat unaffected by the Bank of England’s enthusiasm to make borrowing more expensive.
Whilst we have seen rate turbulence affect housing market sentiment resulting in softer prices in recent months, we can now expect a more stable, normal market in the latter part of this year.
We’re not quite out of the economic woods yet, however there is certainly room for more optimism compared to the latter part of 2022.”
CEO of Octane Capital, Jonathan Samuels, comments:
“Another month, another escalation of the Bank of England’s current stance on raising borrowing costs.
This is the tenth consecutive rise from our friends in Threadneedle Street and miles away from the now distant days of a sub 1% environment.
That said, one hopes that all of the blood has now been squeezed from the stone and that rates have peaked. Surely it’s time that we focus on investing in business growth now that inflation seems to be tamed at last?”
CEO of easyMoney, Jason Ferrando, comments:
“Despite this latest rate rise hurting variable rate borrowers, there is a flip-side for investors and savers that is the yield on their savings may see a better return thanks to today’s Bank of England decision.
This is the ‘see-saw’ of such actions and one hopes that whilst the economy may smart at the cost of money spiking once again that this is somewhat mitigated by borrower returns.
Many high street banks and investment platforms have not increased their investor return yields recently as we have however, and our sector must make more effort to do so.”
Co-founder and CEO of Wayhome, Nigel Purves, comments:
“Yet another hike in interest rates will do little to help the nation’s first-time buyers who have not only suffered due to an extremely inflated rate of house price growth during the pandemic, but now face higher monthly mortgage payments when they do finally make it onto the ladder.
For many, this will only push their aspirations of homeownership further out of reach, as they find they can no longer make the jump as the mortgage required is no longer affordable for them.”
Director of Benham and Reeves, Marc von Grundherr, comments:
“Achieving the heights of a 4% borrowing rate would have been seen as fantastical a year ago yet we have now reached it, the highest since 2008. We all know what 2008 is synonymous with and at this rate (pun entirely intended) we’ll be back to the depths of the financial crisis in short order.
Just as overseas property buyers are returning to the capital after a near three year hiatus, those wanting to do so via a UK mortgage are facing an increasing financial obstacle and with even further pressure on house prices as a consequence.”
Managing Director of Barrows and Forrester, James Forrester, comments:
“Another bank rate hike that will see potential homebuyers crying in their avocado sandwiches.
It’s hard to understand how the government’s quest for growth can be squared with these ridiculous and all too regular jumps in bank rate.
The two are totally at odds with each other and today’s announcement is further confirmation that Andrew Bailey’s hand doesn’t know what Jeremy Hunt’s is doing.
The economy needs a boost as does the housing market and this obvious confusion amongst our so-called leaders is doing nothing to drag us back to being an economic leader in the world.
We’re in danger of becoming a global white elephant economically and it’s frankly embarrassing.”
Jatin Ondhia, CEO of Shojin, comments:
“After ten consecutive rate hikes, there is a worrying sense of déjà vue, as the Bank of England’s heavy-handed approach shows no signs of abating.
Undoubtedly, this move will present further challenges ahead, just days after the IMF downgraded its growth forecast for the UK’s economy.
As investors continue to navigate testing market conditions, the reduction of real returns through higher inflation represents a significant threat to both fixed income investments as well as equities.
Against these headwinds, investors must keep a cool head and consider the tools at their disposal to make their money work harder.
I would expect the diversification of investment portfolios to remain a prominent trend in 2023, as inflation remains in double figures but rates rise.
It is also likely that tax-efficient investments will gain increasing traction in the months ahead, with investors trying to manage returns in the most effective ways possible.”
Alex Lyle, director of Richmond estate agency Antony Roberts, comments:
“The £1.5 million-plus house market remains relatively resilient to rising interest rates although admittedly we are not registering the same volume of new buyers as this time last year.
Overall though, prices are holding and in some cases exceeding expectations, as a significant percentage of buyers within this section of the market do not require mortgage finance.
We have seen three sealed bids since the start of the year, with two leading to record-breaking off-market sales. Both were cash buyers.
The market for properties sub-£1m is much less active and less secure.
Given that it’s the tenth rise in a row and we are already working with a smaller pool of buyers, this latest rate rise will not be helpful to the market.”
Avinav Nigam, cofounder of real estate investment platform, IMMO, comments:
“This increase in interest rates was expected given the pace of inflation.
Rising interest rates have major consequences for the housing market.
There is an immediate increase in the cost of mortgages for the circa 2 million borrowers on variable-rate mortgages, which could mean an increase in the supply of properties for sale, with negotiating power shifting to buyers.
That said, a significant reduction in property prices is not anticipated since demand for homes is strong and growing.
Higher interest rates alongside labour and material price inflation mean that building new homes is getting harder and more expensive.
Many projects are being paused, reducing future supply.
Higher rates further reduce aspiring homebuyers’ ability to afford to purchase a home, reducing demand.
The result of this is more demand for rental housing, and therefore a greater need to put time, money and effort into improving our private rental sector housing stock.
The institutional investors we work with tell us that as interest rates rise, investing in and improving rental housing makes even more sense commercially and socially.”
Commenting on interest rates rising once again, Jon Causier, Partner at global consultancy Simon-Kucher & Partners, said:
“Today’s increase in the Base Rate is the latest step the Bank of England’s ongoing campaign to tame inflation.
As with any change, the effect will be felt differently across different groups. Amongst consumers, savers will benefit from an increase in yield, whereas borrowers, especially those on variable rate mortgages will lose out.
Within the industry, the banks with the stronger deposit-taking franchise and a truly differentiated offering will likely benefit from further margin expansion, whereas the weaker franchises are more likely to pass on the full benefit of the rate increase to depositors.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, comments:
“While 4 per cent may not be the peak for base rate, it is unlikely to be far off.
Fixed rates are influenced by future base-rate movements and therefore not directly linked to what is decided this week.
Indeed, the pricing of fixed-rate mortgages, which soared after the mini-Budget, continues to drift downwards, with five-year fixes available from just above 4 per cent.
It’s unlikely to be long before we see five-year fixes cheaper than base rate.
Those on base-rate trackers will find their mortgage rate increase by 50 basis points.
A borrower with a £250,000 repayment mortgage on a 25-year term and a pay rate of 3.5 per cent will see that rise to 4 per cent, with monthly payments rising from £1,252 to £1,320.
The cumulation of ten successive rate rises is significant.
A borrower with a £250,000 mortgage on a tracker pegged at 1 per cent over base rate will have seen their monthly payments rise from £954 in December 2021, when base rate rose from 0.1 per cent to 0.25 per cent, to £1,461 today.
With a variable-rate deal, the link between the lender’s variable rate and base-rate moves are less transparent.
The lender may decide to pass on none, some, all or even more than the base-rate rise.
Buyers who believe fixed rates will continue to fall may wish to consider a variable/tracker rate product with no early repayment charges, moving onto a fix should rates become more palatable.
However, if you can’t afford to be wrong – that is, if rates were to rise, you would struggle to pay your mortgage – then a fix would be the sensible option.”
Lionel Benjamin, co-founder at AGO Hotels, comments:
“The hike today of interest rates to 4% maybe a necessity to kerb inflation, though the impact on the hospitality industry is not good news.
The hotel sector is grappling with several challenges specifically rising energy prices and third-party suppliers upping their prices in line with inflation.
AGO Hotels have seen overall costs rise to an average of 43% from 36% over the last six months.
Today’s announcement means a further tightening of the purse springs with spending needing to be managed particularly carefully, especially as these additional costs cannot make their way to the consumer.
Interest rates are impacting deals in the market. There has been a slowdown in transactions as investors evaluate the impact of interest rates on the cost and availability of debt.
We are also seeing a debt funding gap as lenders adopt a view of declining real estate values versus pre-pandemic levels.
The sector held its own in 2022 with some record growth in rate and occupancy, this performance recovery may stall as we face uncertainty in the market and operational costs continuing to rise.
However, the sector remains of significant interest to the long-term investors who understand the cyclical nature of Hospitality.”
Commenting on the outlook for SMEs as the Bank of England raises interest rates for the 10th time in a row, Douglas Grant, Group CEO of Manx Financial Group, said:
“Another rise in interest rates was expected despite fears the UK is falling into recession and businesses struggle to survive yet another cashflow squeeze.
The raise should act as an alarm bell for SMEs to review their existing lending structures and ensure they are ready for further hardship.
Slowing inflation data provided a glimmer of hope for small businesses but still represents worrying numbers and indicate that a recession will likely afflict the UK in 2023.
On top of this, this week’s IMF report painted a bleak picture for the UK at a time when most other leading economies are expected to grow.
While many SMEs prepared for these hikes by listening to lenders and locking in their debt into fixed rate structures, it is now too late for other businesses which were not so forward thinking.
We believe that demand for working capital will continue to rise as businesses desperately require liquidity provisions to counteract supply chain issues, increases in wages and a worsening cost-of-living crisis.
Our research revealed that over a fifth of UK SMEs that required external finance over the last two years, were unable to access it. What’s more, over a quarter have had to stop or pause an area of their business because of a lack of finance.
SMEs continue to struggle with accessing finance and, worryingly, this lack of availability is costing them and the UK economy in terms of growth at a time when it is needed the most.
The level of growth that is being prevented is significant and will require novel solutions which are designed to bridge this funding gap.
Despite positive introductions and extensions to loan schemes last year, such as RLS Phase 3, more proactive action is needed.
Since the pandemic-caused economic turmoil, we have been calling for a sector focused permanent government-backed loan scheme which brings together both traditional and alternative lenders to guarantee the future of our SMEs.
As the government looks for ways to power the economy’s resurgence in 2023, the importance of a permanent scheme cannot be understated, it could act as the fundamental difference between make or break for many companies and, in turn, our economy.
We very much hope this is something that becomes a reality.”
Phil Hooper, head of lending at Pluto Finance, comments:
“The Bank of England’s increase to 4% was expected & already priced into the markets.
I would now expect the BoE to now pause as many indicators are showing an improved economic out-turn than expected.
The debt markets appear to remain liquid although adjusting to deal with the new cost of finance”.
Commenting on the Bank of England’s latest interest rate hike, William Marsters, Senior Sales Trader at Saxo UK, said:
“The Bank of England just out with their rate policy decision where it largely looks as expected.
They have raised the Official Bank Rate by 50bps, still see inflation risks, and expect a shallower and shorter recession than previously anticipated.
The move should be largely priced into markets, so there shouldn’t be too much strategy change for mortgage holders.
The December rate decision was a 3-way split with 1 vote for 75bps, 2 votes for no change, and the remaining 6 votes for 50bps.
This time around, there were 7 votes for 50bps, and the same 2 members from December voting for no change.
With no 75bps vote, comparatively it is a less hawkish signal from the MPC.
This supports the view that a downshift is coming. And according to mortgage aggregator Koodoo, they have seen a significant increase of searches for variable-rate loans.
Which means UK homeowners are happy to take the pain now and are betting on rate cuts in the near future.
The other side of the coin is the Central Bank balancing GDP growth, which the BoE still sees as negative throughout 2023.
Although slightly less pessimistic than the IMF forecasts earlier in the week, the number is still negative which will be hard for businesses and consumers alike.
This picture may continue to get worse as the lagged effects of the rate hikes really start to take hold.”
Laura Howard, Forbes Advisor’s mortgage expert commenting on the Bank of England’s latest interest rate increase:
“The uncertainty of the UK housing market, combined with the latest increase to the Bank of England’s base rate to 4% – the 10th in a row – will mean that homeowners and prospective buyers are more worried than ever about their mortgage payments.
Despite the Bank of England promising it would do more to help consumers afford their mortgages, the latest increase could further discourage prospective buyers.
Figures published this week by the Bank already showed that the number of mortgages approved for house purchase in December fell sharply to 35,600, from 46,200 in November – the fourth consecutive monthly decrease.
However, there is some hope in the form of a correction following the fall-out of last autumn’s mini-Budget, which sent the cost of mortgages soaring.
According to data from mortgage broker Better.co.uk, the average cost of a two-year fixed-rate mortgage across all deposit levels today fell to under 5%, having soared to around 6.5% in October last year.
But today’s improvement should be seen in the context that the average rate for a 2-year fix 12 months ago in January 2022 stood at just 2.32%.”
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