Up until last week, many industry commentators thought that after eleven successive increases in base rates since December 2021, interest rates should peak this year at around 4.50%. However, after the shock of the sudden rise in the consumer price inflation from 10.1% to 10.4%, this particular school of thought is now in doubt.
Andrew Bailey, the Governor of the Bank of England, is on record as saying that he expects inflation to fall quite rapidly before the summer. However, because of last week’s unexpected rise in inflation, the Monetary Policy Committee have now left their options for future rate decisions open, saying that the financial and economic outlook has become more uncertain. It now says it needs to see more evidence of how the steep rise in borrowing costs since late 2021 is affecting the UK economy.
The key question is whether this means that bank base rates could now remain at 4.25% or whether there are more increases to come. Andrew Bailey has warned that if inflation becomes ‘embedded’, interest rates will have to go up further.
Inflation remains the real enemy of both homeowners and savers. The next scheduled meeting of the MPC is in May and the Bank of England is clearly hoping that by then it will have evidence that the rapid increases in interest rates over the past 15 months are having the intended effect and that inflation is heading downwards.
However, there’s no doubt that this interest rate uncertainty is impacting the housing market. Housing is now at its least affordable point for around 150 years and first time buyers are very cautious about entering a market when they don’t know if interest rates have peaked. Demand for mortgages has fallen over the last few months as potential borrowers weigh up whether this is the right moment to enter the housing market.
Since 2020, interest rates have been volatile as the world tried to cope firstly with the Covid pandemic, and then with the impact of the war in Ukraine. More recently, the rapid interest rate rises following last September’s mini budget have been a hammer blow to millions of borrowers.
The fall-out was immediate as money markets reacted negatively and interest rates rocketed causing some lenders to pull out of the market altogether. The choice of fixed rate products was severely reduced, and the price of 2-year fixed rate mortgages hit a high of 6.4% – an increase of around 50% in a matter of weeks. Although fixed rate mortgages have started to gradually fall, they are still well above rates seen a year ago.
The other key part in this mortgage conundrum is the fact that over 1.4 million borrowers will be coming off existing fixed rate deals this year – with many of them currently being on sub 2% deals. With a generally shrinking mortgage market, lenders will be keen to hang on to their market share, and borrowers will be desperate to keep their rates as low as possible.
All these factors simply highlight that the uncertainty around the future direction of interest rates remain. It’s imperative therefore that we now start to see inflation start to fall – and fall quickly. Once this happens, confidence will start to return to both the financial and housing markets and first time buyers can once again plan their futures with a degree of certainty.
Martese Carton is director of mortgage distribution at Leeds Building Society
