Interest rate could go up 75bps to 3% on 3 Nov
What are your thoughts on the interest rate potentially increasing by 75 basis points to 3% tomorrow?
What impact will this have on the mortgage market?
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The Bank of England’s mandate is to target inflation at 2% so it will almost certainly increase interest rates, most likely by 0.75%. If they were given a wider mandate than the one they have, namely trying to reduce volatility in the country’s GDP, the decision might be different and create better outcomes. We all know we are in the mouth of a recession. This will mean dramatically slowing inflation, if not deflation and a crumbling economy. The Bank of England will then be forced to reduce rates. Rather than making decisions with historic data and hindsight, I’d like to see Threadneedle Street trying to forecast where the economy is going and making decisions in the best interests of the economy. This would see rates being held at their current level and this could last for longer, before considering reductions. I expect Bank Rate to go up to 4% by early Spring. This will damage households and businesses and make the recession worse. They will be held in place at a high rate for too long as the Bank waits for data showing how bad things were in the previous months, and then they will fall away into next autumn. They will never return to the historic rates of near zero, but I expect to see them down to about 2% by next Christmas as I expect the recession we are already in to be a bad one.
The housing market will dry up over the next six months with or without a rate rise. It always does when the economy is going through a tough spell. I don't expect new mortgage rates to increase as lenders have pretty much factored the rate rise into their current pricing. The only thing that might change that is if the Bank acts more aggressively than expected.
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0.5%-0.75% is priced in. A rate rise will have little impact on the mortgage market at present as the rates on offer do not reflect a base rate of 2.25%. If anything, once the decision has been made I think it will provide some stability. Remember a few weeks ago we were talking about potential increases of 1.5% so we have come a long way in a short amount of time. For most of 2022, lenders have not really needed to compete with each other to fill their boots. However, with the threat of their purchase pipeline disintegrating, they will need to aggressively compete unless they write off Q1 and Q2 2023. Many have shareholders who will want to see growth regardless of the market.
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Whilst people are currently running and panicking about the BOE increase, people are not realising that lenders fixed rates are based on uk swap rates (Sonia), swap rates have started to drop since the appointment of Rishi, I feel this increase is going to have little to no impact on the uks fixed rates as lenders have been pricing their fixed rates as if the base rate was 5% for some months now. Tracker clients will obviously feel the pinch of this increase but the majority of new tracker clients will still have a lower rate than those that fixed during the mad mortgage panic. I think we will peak soon and we will start to see a reduction in the BOE base rate within the next 12-18 months, then this matter can be filed away with old news such as covid and the fuel crisis
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As the economy heads into recession before the year ends and with the deep spending cuts by Sunak, high street banks are most likely to further raise their mortgage rates and thus impact home buying. New mortgage applicants will find it harder to get a foothold on the property market now that mortgage rates are likely to rise further after the BoE’s announcement tomorrow. But while Sunak and Hunt have assured us that income tax and VAT hikes are not an option, household real incomes still fall behind soaring prices of goods and services, which make the gap between renters’ wages and housing affordability much wider, dashing any hopes of ownership.
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The predicted 0.75% base rate hike may not lead to a similar hike in fixed-rate mortgages, simply because the latter are already overpriced following the mini-Budget debacle. But even if fixes remain largely unchanged or increase just 0.25% in response, affordability is likely to remain extremely restricted. Even tracker rates, which are considerably cheaper, are likely to be well above 5% by the middle of next year. Unfortunately, the pain will continue for the nation's borrowers until the inflation beast is tamed.
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This rise has been well publicised by the Bank of England. In fact, they were talking about a 1% rise earlier in October, so most lenders' fixed rates are already accounting for this increase and most brokers will have been talking to their clients looking at variable rate deals with this increase already in mind. So, the impact of a 0.75%-1% increase should be minimal. However, a rise of less than 0.75% or over 1% would be a surprise to the market and we'd see rates move quickly to account for that. What will be interesting, and potentially have a bigger effect, is when the minutes of the MPC meeting are made public, as that will give an indication as to where the Bank is likely to see future rate changes heading.
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This rate increase will not have an impact on the mortgage market, as lenders have already priced their products with future interest rates at 6%. Especially, since the impact of the Kamakazi budget.
We have seen many lenders reduce their fixed rate in the past week, some as much as over 1%. So, this expected Bank of England base rate will have a minimal impact on fixed rates. Trackers and discounted rates will increase, but this happens in normal market conditions.
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The mortgage market has priced in rate rises far in advance of this weeks suspected rate rise. It is likely, that whilst the base rate continues to rise we will see the rates available in the consumer market continue to realign downwards towards a rising base rate, to a point where the differential between the base rate of market rates will close again to normalised levels.
A base rate rise will likely have more economic impact outside the mortgage market this month in my opinion. The greatest risk is to confidence in spending in a time of year which is commercially important, specifically to the retail and hospitality sectors, and that of course is likely to deepen the likelihood of a recession.
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A lot of future base rate rises between now and spring 2023 have already been priced into mortgage fixed deals so I don't expect to see every mortgage lender rushing out to put rates up after the meeting and infact in the last 10 days a number of lenders have lowered the fixed rates they have available. Those that have opted for tracker rates will see a direct impact on their mortgage rates though off the back of this change.