REACTION: Bank of England hikes interest rate for eleventh time in a row

With this week’s rise in inflation combined with a move by the US Federal Reserve to go ahead with a 0.25% rise, the BoE had few choices.

bank of england

The Bank of England’s decision yesterday to increase interest rates by 25 basis points as it looks to keep a lid on inflation left many estate agents and property pundits hoping that the rate cycle has reached its peak.

With this week’s unexpected rise in inflation to 10.4% combined with an overnight move by the US Federal Reserve to go ahead with a 0.25% rise left the Bank of England with little choice. The Bank’s Monetary Policy Committee decided by a 7 to 2 vote to bring rates to 4.25% – the eleventh interest rate rise in a row and the highest rate since 2008.

“CPI inflation increased unexpectedly in the latest release, but it remains likely to fall sharply over the rest of the year,” minutes from the MPC revealed.

“The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far.”

UNCERTAINTIES

Uncertainties around the financial and economic outlook have certainly risen.

Anthony Codling, Chief Executive of Twindig, says that the Bank of England’s Monetary Policy Committee did not pull any punches and adds: “As Tony Blair may have said the Bank of England has three priorities ‘Inflation, inflation and inflation’. If inflation continues to rise, Bank Rate will be increased.”

The timing of this hike is inconvenient, to say the least.”

Jeremy Batstone-Carr, Raymond James Investment Services
Jeremy Batstone-Carr, Raymond James Investment Services

Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services, reckons that the Bank of England’s rate plans were thrown into disarray by inflation rearing its head earlier in the week.

“The timing of this hike is inconvenient, to say the least, given the current uncertainties in the banking sector and because the Bank would ideally be nearing the end of its tightening cycle by now,” he says.

“Instead, with the worst inflation in the G7 and uncertainty over the current trend, the Bank may still be some distance away from pausing its rate hikes, unlike its American peer who signalled this week that the end of monetary tightening is on the horizon.

“The turmoil within the banking system may be keeping central bankers awake at night but their primary mandate is to ensure price stability, which is unfortunately not a current feature of the UK economy. The Bank has been jolted into action, they have had to adjust any plans for a gentle easing of hikes leading to an eventual pause.”

CHALLENGES

Nathan Emerson, Chief Executive for Propertymark, says that the trade body expects more market challenges ahead.

emerson
Nathan Emerson, Propertymark

“For some current homeowners, the cost to remortgage will mean finding an extra £200 to £300 a month on average, whereas for many of those entering the property market, they will need to re-imagine their budgets and adjust their affordability,” he says.

“Previous increases are returning us back to a more sensible market with supply and demand levels evening out.

“This in turn has started to soften house prices and we would expect this trend to continue to counteract the unsustainable transaction levels and unachievable house price increases seen previously.”

Talk of a big price correction in home values has been overplayed.”

Richard Donnell, Zoopla
Richard Donnell, Zoopla

Richard Donnell, Executive Director of Research at Zoopla, doesn’t believe that the increase in base rate will make much difference to the outlook for the housing market.

“Demand for homes is down on last year but sales are still being agreed albeit at a slower rate. People still want to move and households are resetting their plans in an environment of higher borrowing costs.

“Talk of a big price correction in home values has been overplayed and if you price your home sensibly, it’s likely to attract interest subject to some negotiation on the final price.”

Dominic Agace
Dominic Agace, Winkworth

Winkworth Chief Executive Dominic Agace says: “We are now near the peak of the tightening cycle and with a strong appetite from lenders remaining, mortgages now appear to have settled in for the long term at around 4%.

“At this level, with a strong employment market and improving economic sentiment, we see a more benign year ahead than expected.”

This could be a fly in the ointment for housing.”

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Nick Leeming, Jackson Stops

Nick Leeming, Chairman of Jackson-Stops says that the latest decisive action in a marathon of measures by the Bank of England to bring inflation down by the end of the year should have the long-term effect of calming the markets.

“This could, however, be a fly in the ointment for housing, as mortgage borrowers watch intently to understand the effect this may have on current deals,” he cautions.

Alex Lyle
Alex Lyle, Antony Roberts

Alex Lyle, director of Richmond estate agency Antony Roberts, says: “A hold in base rate would have been very well received, helping support the momentum we are currently seeing in the housing market. Further rate rises are most unhelpful so hopefully base rate is close to its peak.”

There is a close call between change and no change.”

Jeremy Leaf

Jeremy Leaf, north London estate agent and a former RICS residential chairman, says that there is a close call between change and no change.

“This latest rise in rates is a huge disappointment for the housing market as we were hoping the Bank would trust in its own data and leave well alone.

“Of course, it is important to reduce inflation as far as possible in view of its impact on buyer confidence to take on debt. Overall, the economy still feels fairly weak as real incomes are falling so we would have liked to have seen at least one month without a rate rise.”

Who’d have thought salad costs would be dictating millions of people’s mortgage rates?”

Rhys Schofield, Peak Mortgages and Protection
Rhys Schofield, Peak Mortgages and Protection

When it comes to home finance, Rhys Schofield, managing director at Derbyshire-based mortgage advisers, Peak Mortgages and Protection, says the Bank’s move was an obvious play.

“Who’d have thought salad costs would be dictating millions of people’s mortgage rates?” he quips.

And Andrew Montlake, managing director of national mortgage broker Coreco, agrees the Bank’s hands were tied.

They say a week is a long time in politics but a day is an aeon in the financial markets.”

Andrew Montlake
Andrew Montlake, Coreco

“They say a week is a long time in politics but a day is an aeon in the financial markets. In the past few days, we have seen the contradictory effects of a banking drama pushing rates down on the one hand, and the surprise rise in inflation pulling in the opposite direction.

“These opposing forces left the Bank of England with no real choice but to increase rates as expected by 0.25%.”

He says that doing nothing was not an option and a 50 point rise would have gone too far.

“What happens next is speculation but the Bank of England should now take a proverbial time-out and give both the public and the markets time to breathe and settle.

“A period of calm is imperative and rate rises take time to filter through.”

49 DAYS

And it seems that period of calm can’t come soon enough. There’s now 49 days until the Bank makes its next Rate decision on May 11th.

But as Montlake warns: “Central banks tend to go too far and only stop when something breaks. Potentially we are at that point now. This rollercoaster of ups and downs could continue for some time yet.”


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