For the 14th consecutive time, interest rates will rise to 5.25%, with the Bank of England warning that interest will likely remain high for another two years
The Bank of England (BoE) has announced another interest rates rise, warning that whilst a recession was unlikely, the cost of borrowing will stay high for the foreseeable future.
Aiming to bring inflation (currently 7.9%) down sustainably to the 2% target, the Bank said that policy would stay “restrictive enough for long enough”.
In real terms, financial experts are predicting another 0.25% interest rate increase in 2023, staying at that level throughout 2024 and slowly deescalating in 2025.
This follows statements from Andrew Bailey, the Bank’s governor
“Inflation is falling, and that’s good news. We know that inflation hits the least well-off hardest, and we need to make sure that it falls all the way back to the 2% target,” he commented.
Bailey continued, saying that the Bank expected the next UK inflation announcement in two weeks’ time to reveal that the annual rate of price rises declined in July to about 7%, with a larger step down to about 5% in October.
Chancellor Jeremy Hunt warned that the UK was in a “low growth trap”
Wage increases brought about by growing demand for workers, a slow decline in food inflation and rising services costs were identified by the Bank as barriers to bringing down inflation.
Chancellor Jeremy Hunt was equally circumspect, saying to Sky News that the UK was in a similar position to many other advanced economies: “It’s not just the UK, but Europe, the US, Canada, Japan…We’re all in a low-growth trap that we need to get out of.”
He promised that the Autumn Statement would deliver “a plan that shows how we break out of that low-growth trap and make ourselves into one of the most entrepreneurial economies in the world. That’s what we want.”
Time will tell if the 2023 Autumn Statement will be as startling as the 2022 September mini-budget.
Industry responses to the latest interest rate rise were unsurprised
Following the Bank of England’s decision to raise the base rate to 5.25%, a 0.25% increase, Nick Leeming, chairman of Jackson-Stops, comments: “Although expected, it is fair to say that most were hopeful that the Bank of England would have refrained from yet another rate rise, with this now being the 14th hike in a row.
“Today offers a very different picture to December 2021, when the base rate sat at 0.1%. But green shoots are growing by the day. Inflation is now falling, which suggests that the tide may be turning, and if this remains the case for July and August, this could be the last rate hike for some time allowing investment markets time to settle again.
“For the property market, while incremental changes to the base rate won’t derail buyers and sellers plans entirely, the increased pressure that has been put on the cost of borrowing means realistic property pricing is essential to achieve a sale, especially at the mid-level of the market.
First-time buyers persevere, despite the conditions
“What is good news for the transaction market is that mortgage approvals have continued to increase. Mainstream lenders have announced rate cuts on their mortgage deals and first-time buyers remain active, often the lifeblood of our industry. Across the Jackson-Stops network we have seen a 13% increase in completions in July compared to June, showing that committed buyers remain resolute in their searches.”
Moneyfacts reported that the average two-year fixed residential mortgage rate of 6.85% was unchanged since Tuesday, whereas the 5-year fixed residential mortgage rate dropped to 6.35% after the latest interest rates rise.
“It’s too soon to tell what the race to the end of the year will look like; while it’s still not a sprint to the finish, it is certainly not a marathon either,” Nick Leeming continued. “For now, the market remains buoyed by continued exchanges and steady demand levels from an intersection of buyers. It’s clear the market is far from static even in the face of economic headwinds.”
