Bank of England risks policy misstep as markets price in rate hikes, says Knight Frank
Rising energy costs and swap rates could weigh on housing demand and transactions.
The Bank of England risks tightening monetary policy at the wrong time as geopolitical tensions drive inflationary pressures, according to analysis from Knight Frank.
Tom Bill, head of UK residential research at Knight Frank, said rising oil and gas prices linked to the Middle East conflict have shifted market expectations, with two rate hikes now priced in for this year compared with expectations of cuts at the end of February.
The Bank’s Monetary Policy Committee voted unanimously to hold rates at its latest meeting and signalled it “stands ready to act” on inflation, a move widely interpreted as opening the door to further increases.
Bill said: “The Bank almost seems like they’re trying to fight the last war as opposed to this one.
“However, almost every economic variable is in a very different, if not the exact opposite, place now compared to where it was in 2022.”
He said the UK economy is more vulnerable to higher rates than in previous cycles, citing weaker labour market conditions, slower GDP growth and a more challenging tax environment.
Rising swap rates have already pushed fixed mortgage pricing higher, with most deals now above 4.3%, while the inversion of the two-year and five-year swap rates reflects expectations of short-term upward pressure on borrowing costs.
Bill said higher borrowing costs, alongside uncertainty linked to the conflict, are likely to weigh on housing activity in the near term, with mortgage approvals already 10% below the five-year average and transactions down 5%, according to HMRC data.
He added: “Another hold must be the most likely option next month.
“Whether that is still the most probable outcome closer to the time or whether we see some MPC members vote for a cut depends on how de-escalatory Donald Trump’s latest social media post proves to be.”
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