Did the Bank of England (BoE) have any choice over the latest interest rate hike? And is a further raise warranted or even justifiable given how homeowners are suffering already?
Confidence in BoE governor Andrew Bailey is at rock bottom. His effective stewardship of the Bank has been widely called into question.
And assurances from the BoE that rate rises to date (and others to follow) will succeed in meaningfully tempering inflation hold limited credibility. So far, base rate increases have not had the desired effect — they have only inflicted pain on borrowers.
In the next few months, 400,000 fixed-rate deals will expire and we’ll see the longer-term effects of the higher cost of borrowing
Glenhawk chief executive Guy Harrington strongly questions the thinking behind the most recent rate increase and any future hikes.
“The BoE may argue it is being forced into a corner, but this has to be the end of the rate hikes. As a tool for bringing down inflation, it’s clear the current approach is failing, so other solutions need to be found.”
Harrington adds: “The mortgage market is creaking under the strain, and distress is starting to show. It may already be too late to prevent an unprecedentedly painful winter for UK homeowners.”
ONP Group partnerships director Mark Tosetti says there is a feeling in the industry that the BoE missed an opportunity to convey its focus on bringing down rates at an earlier stage. He argues that a clearer message from the Bank could have helped mitigate the impact of rising inflation before it reached alarming levels.
“There is a valid argument that the BoE could have taken more decisive action, considering the time it takes for rate changes to permeate through the economy. By acting swiftly, the Bank could have stemmed the economic bleed sooner and achieved a better outcome for all.
The mortgage market is creaking under the strain, and distress is starting to show
“It is important to acknowledge that rate changes require ample time to filter through the economic system, underscoring the significance of early and assertive measures by the Bank in tackling inflation effectively.”
Tosetti does not echo Harrington’s grim synopsis, however.
“The mortgage market has shown resilience in the face of challenges. While strains exist, the market has weathered previous downturns. Government support and initiatives enhance affordability and accessibility.
“While challenges may lie ahead, it is not too late to prevent an unprecedentedly painful winter for UK homeowners.”
Mortgage Advice Bureau deputy chief executive Ben Thompson believes the BoE had little choice but to try to combat sky-high inflation.
“Like elsewhere in the world, it chose interest rates as its weapon of choice.
“This has been particularly painful for those with variable-rate deals and means that most people will face an increase in their next mortgage,” says Thompson.
The BoE may argue it is being forced into a corner, but this has to be the end of the rate hikes
What other options exist to tackle inflation? Thompson suggests the BoE and the government must work in tandem with co-existing fiscal and monetary policies that complement each other.
“Raising taxes (which has been done through threshold freezes) combined with increased rates was designed to slow spending and reduce inflation.
“Food inflation has been particularly high in the UK compared with elsewhere, and wider political ramifications have all hindered inflation. Supply-side reforms (such as enhancing productivity, market regulation and deregulation, and tightening government spending) can also all help lower inflation.”
Among the G7 nations, the UK has the joint-highest inflation with Italy, and that is despite 12 consecutive interest rate rises from the BoE. This would tend to support Harrington’s argument that the current policy is not working.
While challenges may lie ahead, it is not too late to prevent an unprecedentedly painful winter for UK homeowners
Given that two of the nine members of the Monetary Policy Committee voted for not increasing the base rate at the last meeting, clearly there is no unanimity at the BoE.
And yet the market consensus is that more interest rate rises are to come. Most City watchers are pencilling in a peak of 5%–5.5% this year.
The lack of confidence in policymakers means it could be argued that the BoE is now part of the problem, rather than the provider of the solution. By its own admission, its forecasting model isn’t working. And its failure to lower core prices and get anywhere near its 2% inflation target is both concerning and confidence sapping. Despite a recent fall, below market expectations, inflation is close to double digits at 8.7%.
Bailey’s recent admission that the BoE had “big lessons to learn” on monetary policy was hardly comforting. The Bank’s consensus estimates point to inflation continuing to fall for the rest of the year. But do the public and UK businesses agree, or even have much faith in these projections?
With confidence in the BoE in short supply, workers’ demands for wage rises may intensify and businesses may feel compelled to set prices higher. Essentially, these factors would heighten, not counter, inflation.
Like elsewhere in the world, the Bank chose interest rates as its weapon of choice
As one senior mortgage industry figure said: “I was no great fan of [former BoE boss] Mark Carney, but I would have him back in a shot to replace the current governor who is simply not up to the job.”
Time will tell if the BoE leadership changes sooner rather than later — as things stand, Bailey has another five years left to serve.
Time will also tell how homeowners and the mortgage sector bear up during increasingly testing times.
Thompson says: “By and large, the market is standing strong, with new products being introduced. But the next few months will see 400,000 fixed-rate deals due to expire, and this will be where we begin to see the longer-term effects of the higher cost of borrowing on the market”.
This article featured in the June 2023 edition of MS.
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