Bank of England warns UK housing market has weakened as it lifts interest rates again – business live | Business

Explainer: What Bank of England interest rate rise means for you

Rupert Jones

Today’s move is yet more bad news for the approximately 2.2 million people on a variable rate mortgage, who are already having to contend with a raft of rising costs.

Many now face paying hundreds of pounds extra a year, as my colleague Rupert Jones explains.

About half of those 2.2 million are either on a base rate tracker or discounted-rate deal. The other half are paying their lender’s standard variable rate (SVR).

A tracker directly follows the base rate, so your payments will almost certainly soon reflect the full rise. On a tracker now at 4.25%, the interest rate would rise to 4.75%, adding £40 a month to a £150,000 repayment mortgage with 20 years remaining.

This person’s monthly payment would rise from £929 to £969. As recently as June this year, this same individual would have been paying £776 a month – so their home loan bill has now jumped by 25% in just six months (assuming they have had their deal for a while).

Of course, for those with bigger mortgages, the numbers will be bigger. Up that mortgage to £500,000 and the payment will rise by £135 (from £3,095 to £3,230).

The Bank of England’s policymakers remain concened that inflationary pressures are building in the economy – citing recent price and wage increases.

The MPC says:

The labour market remained tight and there had been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justified a further forceful monetary policy response.

This week’s unemployment report showed that regular pay rose by a stronger-than-expected 6.1% in the August-to-October period, the biggest gain since records began in 2001.

The Bank of England is walking a narrow path, as it tries to limit inflation without causing an even deeper recession, says Josie Dent, Managing Economist at the CEBR think tank.

In particular, by raising rates, the Bank is increasing costs for the millions of households that will face higher mortgage costs from next year onwards. This will mean many of these households will have to cut back spending in other areas, leading to weaker economic activity.

However, concern was also expressed today that a tight labour market could lead to more persistent inflation, justifying further interest rate rises.”

Over in Frankfurt, the European Central Bank has followed the Bank of England – and the US Federal Reserve – by lifting its interest rates by half a percent.

It says:

The Governing Council today decided to raise the three key ECB interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them further.

In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.

That takes the interest rate on the ECB’s main refinancing operations to 2.5%.

Economists agree that UK interest rates will probably rise further in the months to come, but disagree about where they will peak.

Thomas Pugh, economist at audit, tax and consulting firm RSM UK predicts that rates will hit 4.5% in 2023.

The smaller 50bps hike, which takes interest rates to 3.5%, the highest level in 14 years, suggests the end is in sight for the BoE’s tightening cycle.

However, the minutes of the meeting made it clear that although the end is in sight, there are still more hikes to come. We expect rates to rise to 4.5% early next year and that they won’t start to be cut again until early 2024.

Paul Dales of Capital Economics also predicts the Bank will lift rates to 4.50% early next year before cutting them back to 3.00% in 2024.

There were three ways in which this felt a bit like another “dovish hike” from the Bank. First, in November seven MPC members supported the 75bps hike. Today only six members voted for the 50bps hike. Catherine Mann did vote 75bps. But Swati Dhingra and Silvana Tenreyro both voted for no change. They said “the current setting of Bank Rate was more than sufficient”.

Second, the passage in the statement in November on risks to inflation being skewed to the “upside” was dropped.

Third, the Bank dropped the section that pushed back strongly against market pricing that rates would rise to a peak of 5.25%, but that may just be because market rate expectations have since fallen back to 4.50%.

But analysts at ING predict rates will peak lower, at 4%.

In a note to clients, ING’s developed markets economist James Smith says:

For now, our best guess is the Committee implements another 50bp hike in February before calling it a day. The hawks can continue to point to 6% wage growth and the fact that core services inflation is running higher than expected in November.

But today’s meeting is a further demonstration of the delicate balancing act facing the BoE, between mitigating the risks of a tight jobs market on the one hand against mounting concerns about the housing market and the health of corporate borrowers on the other.

We expect Bank Rate to peak at 4% in the new year, although we aren’t yet convinced a rate cut will be as quick to follow as in the US (where we expect cuts shortly after the summer).

The Institute of Directors has warned the Bank of England not to tighten monetary policy too tightly, as it tries to pull down inflation.

Kitty Ussher, IoD chief economist, says:

“From a business point of view, if higher interest rates are required now to stabilise prices in future, then the resulting ‘necessary recession’ should be as short and shallow as possible.

“With the labour market starting to turn, the economy already contracting and base effects from last year’s price rises expected to bring next year’s headline inflation rate down automatically, it is important that the Bank does not tighten too far and risk prolonging the pain. Not only would that be bad news for households and businesses, but it would also risk the Bank undershooting its own inflation target in the future.

“On balance, while today’s rise may be justified, given the long lead time between interest rate rises and the impact on demand, we may soon be getting to the point where enough has been done.”

An entire generation of borrowers weaned on ultra-cheap rates is facing a serious reality check, warns our economics editor Larry Elliott.

The speed at which rates have risen and the dawning realisation among borrowers that there will be no return to the emergency levels reached during the Covid-19 pandemic is bound to have an impact on an already weak economy. Interest rates were at rockbottom levels for well over a decade following the financial crisis of 2007-08 and an entire generation has grown up believing that ultra-cheap borrowing is the norm. What’s more, many people have bought houses at high loan-to-income ratios in the belief that mortgage rates will be permanently low.

Those people have now seen interest rates rise by more in the last 12 months than in any year since 1989, and are now facing a serious reality check. While fixed-rate home loans will shield for a while, they will eventually have to remortgage at significantly higher rates.

As the minutes of the latest monetary policy committee (MPC) meeting show, the boom in the housing market is over. Buyer demand is weakening and both the Nationwide and Halifax have reported sharp monthly falls in property prices.

The good news for over-extended borrowers was that two of the nine MPC members – Swati Dhingra and Silvana Tenreyo – voted to keep interest rates at 3%. The bad news is that most of the committee thinks further increases in rates “might be required” for a sustainable return of inflation to its 2% target. One member, Catherine Mann, backed a 0.75 point increase (as flagged here).

Here’s Larry’s full anaysis:

Most indicators tracking the UK housing market have continued to weaken in recent months, the Bank of England points out.

The minutes explaining today’s interest rate decision point to the latest data from lenders showing that house prices have fallen this autumn, after rising sharply during the pandemic.

They say:

Although the official UK House Price Index had increased strongly in October, house prices had fallen quite sharply in the Nationwide and Halifax indices in October and November.

The November RICS survey had shown further declines in price balances and continuing weakness in indicators of housing market activity.

According to higher-frequency Zoopla data, the volume of offers made on properties by potential buyers had declined to below their normal seasonal levels.

A majority of the Bank of England’s nine monetary policymakers believe further interest rate rises may be needed at future meetings, to bring inflation down towards its 2% target.

The minutes of the MPC meeting say:

The committee has voted to increase Bank Rate by 0.5 percentage points, to 3.5%, at this meeting. The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response.

The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target.

There are considerable uncertainties around the outlook. The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary.

The MPC hold their next interest rate-setting meeting on 2 February 2023.

The Bank of England’s economists expect the UK to fall into recession this quarter, although they now expect a smaller contraction.

The minute of the monetary policy committee meeting say:

Bank staff now expect UK GDP to decline by 0.1% in 2022 Q4, 0.2 percentage points stronger than expected in the November Report.

Household consumption remains weak and most housing market indicators have continued to soften.

Surveys of investment intentions have also weakened further.”

That would put the UK into a technical recession, as the economy shrank by 0.2% in Q3.

Last month, the Bank forecast that the UK could be entering its longest recession in a century.

The decision to lift UK interest rates to 3.5% is NOT unanimous – with Bank of England policymakers split over the correct level of borrowing costs.

Six members of the monetary policy committee – governor Andrew Bailey, plus Ben Broadbent, Jon Cunliffe, Jonathan Haskel, chief economist Huw Pill and Dave Ramsden, voted in favour of a half-point rate hike.

But three members voted against.

Two members – Swati Dhingra and Silvana Tenreyro – preferred to maintain Bank Rate at 3%. Catherine L Mann preferred to increase Bank Rate by 0.75 percentage points, to 3.75%.

Newsflash: The Bank of England has raised UK interest rates to 3.5%, the highest since October 2008.

The Bank’s monetary policy committee decided to lift borrowing costs by half a percentage point from 3%, as economists had predicted, as it continues to battle inflation.