COMMENT: Why did the Bank of England hike the Base Rate so aggressively?

Leading estate agent cases a critical eye over yesterday's decision to raise the base rate by half-a-percent to 5%.


Why did the Bank of England (BoE) increase Interest Rates to ½% rather than ¼%, which would have been kinder to the Economy?

I think the BoE panel were over-reacting to their failure a few years ago to increase the cost of money and thereby allowing a loose monetary system for as long as they did, resulting in the present hyper-inflation environment.

They could have gone up by a ¼% and given themselves more headroom to squeeze again in the forthcoming months and I would suggest that 51/2-6% could well be the top of the cycle.

In the past, before the advent of long-term fixed rate mortgages, any tightening of the interest rate level would have had an immediate effect on consumer demand.

But today there is a considerable lag between cause and effect as illustrated by the stubbornly persistent inflation rate, which is still much higher than either the BoE or the Prime Minister would like most.

Rishi Sunak promised to half the rate of inflation during this year, which looks like a fanciful aspiration at the moment.”

It can’t be much fun for mortgagors on a variable rate to pay circa 6% when hitherto they may have been paying 1%, 1.5% or 2%.

This sucks 4% from consumer spending which is exacerbated by higher energy costs, even though they are dropping of late.

Food inflation is also stubbornly high. I wonder, with oil price, commodities, shipping costs all moving south, if the opportunists in the food supply and retailing sectors are not having a field day.

There is still very little sign of a significant increase in supply of properties for sale, particularly in the middle to upper markets, which means that underlying values will still not change much despite the higher cost of borrowing.

The value of homes at the lower end will inevitably drop as the credit squeeze gets worse, and if this is the case, Christmas could come early for the first time buyers, who will benefit from a value reduction even though the cost of borrowing will temporarily be higher than they would like.

Trevor Abrahmsohn is founder and boss of agency Glentree Estates.

One Comment

  1. Memo to the BoE policy committee: Raising interests rates to curb inflation is not working……
    There are millions of people with years to run on their fixed rates; visit a pub, restaurant or shopping centre and there is money around (quantative easing, anyone?) – and suppliers, retailers etc. have long since realised that they can raise prices with impunity. They are hopefully not as clueless as they seem, so can’t help thinking there’s a political motive here.

What's your opinion?

Back to top button