Bank Rate raised to 4.25%: What does it mean for the UK housing market?
Lenders are tinkering with mortgage rates as a contradictory set of events unfold but higher rates are here to stay.
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Raising the bank rate by 25 basis points felt almost inevitable given the message the Bank of England would have sent if it had done nothing or gone further last Thursday.
Leaving the rate unchanged would have created doubts about how much economic contagion it still expected from the collapse of Silicon Valley Bank (SVB) and the Credit Suisse bailout.
A rise to 4.5% from 4% would have left the Monetary Policy Committee open to accusations of overreacting to February’s surprise jump in inflation or adding to pressures within the banking system and wider economy by tightening too quickly.
It raised a question that must have occurred to many people in recent years, who’d be a central banker?
Splitting the difference was always the safest option.
So, what does a rise to 4.25% mean for the UK housing market? In short, not much.
There has been upwards, downwards, and sideways pressure on mortgage rates in recent weeks as lenders have digested the varying implications from the slump in housing sales, February’s inflation data and the mood of caution that has entered swap markets due to events in the banking sector.
The good news for buyers is that any rate movements have paled into insignificance compared to the rollercoaster ride that followed last September’s mini-Budget and the overall picture is one of stability.
The latest move by the Bank of England is unlikely to dampen buyer demand, which is proving more resilient than expected against an improving economic backdrop. That said, we expect prices to fall by a few percent this year as more homeowners transfer to higher fixed-rate deals and supply rises from the lows of the pandemic, as we explore here.
“If you forget the inflation numbers and Credit Suisse for a moment, the latest rise was priced in by lenders, which means the impact on mortgages will be limited,” said Simon Gammon, head of Knight Frank Finance.
“Rates should fall in the longer-term but until we get to the point where inflation and the bank rate have clearly peaked, I suspect lenders will keep tip-toeing up and down with their rates depending how confident they are feeling at the time.”
Together with the rate decision, the Bank of England painted a more favourable economic outlook. It echoed the Office for Budget Responsibility, which issued its own more upbeat economic assessment alongside the Budget two weeks ago.
“Wholesale gas futures and oil prices have fallen materially,” the Bank said, explaining why it now expects inflation to fall further than it did in February. However, the energy price statement was not news to some economists.
“The only shocking thing about that statement is that it’s taken them so long to realise it,” said Savvas Savouri, chief economist at hedge fund Toscafund. “The Bank was as wrong in its outlook as it was late to normalise the base rate. For its part, inflation will end the year markedly and welcomely lower.”
He doesn’t think the turmoil in some parts of the banking sector will spread to UK mortgage lenders.
“Neither the events in the United States nor with a particular large Swiss entity, pose any read through to the U.K. banking sector, which has been welcoming of the uplift to net interest income provided by moving the rate off the bottom.”
There is inevitably real pain as rates rise, but Savvas says ultra-low rates are a sign that not everything is right in the wider economy.
“A well-functioning UK economy needs the base rate well away from zero, with a figure beginning with a four not to be feared by households or businesses,” he said.
It is the new normal for rates. For those with memories that stretch further back than 2008, it looks very much like the old normal.