A positive set of economic data, which in particular reflects a healthy labour market with unemployment at its lowest level for 42 years and the number of positions vacant at a record high, together with inflation stubbornly sat at 2.4 per cent for the last couple of months, pushed the Bank to move the rate upwards towards more normalised levels.
Mr Haldane notably recommended last month that the interest rate should increase.
Whilst the Bank Rate held in June, the unanimous vote amongst the Monetary Policy Commission (MPC) this month has seen the Bank Rate rise to its highest level since March 2009.
The MPC sentiment would appear to be that there is currently spare capacity in the economy, so in order to prepare for, as Mark Carney described, the worst-case scenario of a “disorderly, cliff-edge Brexit” it was decided to start on the process of moving interest rates upwards now, towards a more normalised level, whilst there is still slack in the system to do so.
Mr Carney also made reference in his press conference today to the prospect of “another three interest rate rises over the next three years”, however he also stressed that this would only be if the economy could sustain such movement.
Many had predicted that the interest rate would increase today, although recent Brexit jitters had led some to conclude that consumer sentiment, particularly around the housing market, might be impacted negatively.
Therefore suggested that it was possible that the Bank of England might hold off making any changes until November so that the outcome of ongoing trade negotiations were known before taking any decisions.
Which means that news of today’s rise, whilst not met with surprise per se, hasn’t been seen as particularly positive by many in the UK property industry either.
Mark Carney Governor of the Bank of England
Mark Carney really is pulling the rug from beneath the nation’s aspiring and existing homeowners.
Jeremy Leaf, former RICS residential chairman, explained: “It’s not the relatively modest increase in interest rates which is significant – the message it sends about their future direction is far more important.
“The change is likely to compromise already fragile confidence to take on debt in the property market and wider economy. There are still many borrowers on variable and tracker mortgages who will be immediately affected so property prices and transaction numbers will probably continue to soften, underpinned by the shortage of stock.”
Founder of online estate agents Emoov, Russell Quirk, also commented: “Mark Carney really is pulling the rug from beneath the nation’s aspiring and existing homeowners.
“The Government’s failure to build any meaningful level of housing stock is pushing prices ever higher and now the Bank of England has hit them with an increase in interest rates that will see mortgage payments increase, while resulting in a pitiful return on their savings.”
Russell added: “Although today’s hike will be digestible for many, it should act as a warning shot for UK homebuyers and homeowners.
“Yes, the cost of borrowing remains low, but interest rates are now at their highest in a decade and could continue to snowball, putting many in a perilous position when they come to buy or remortgage.”
Of course, recent developments in the way that mortgage affordability is assessed, to some extent, do protect those taking out a mortgage from borrowing beyond their means. Revised underwriting ‘stress tests’ were introduced in 2014, so that now when a customer applies for a mortgage, the lender assesses their ability to pay not just at the prevailing interest rate, but also in the event that the Bank of England Base Rate reaches seven per cent.
However, there are millions of households in the UK who have bought or remortgaged over the last decade and have therefore never known an interest rate in their tenure as a homeowner of over half a percent.
Which means that today’s start on the road to the Bank Rate moving towards a more ‘normalised’ level may indeed cause concern, even for those with fixed rate products, as of course we don’t know how expensive borrowing could be in the future.
So, how could today’s decision impact the UK property market in the short and medium term?
One would suggest that there may well be a sharp intake of breath as those who’ve not yet applied for a mortgage take in the realisation that the cost of borrowing can and will now rise.
A decade of ‘emergency level’ interest rates has given many consumers a false sense of security, so today could be a timely reminder for those who are looking to move to ensure that they don’t overstretch themselves by doing so.
This could well impact on house prices in the short-term as a mood of caution, particularly in areas of the country where we’ve seen consistent growth over the last twelve to eighteen months, overtakes the current one of buoyancy.
One should also not discount the fact that lenders are likely to be more circumspect around values as well, which could lead to the current reports of down valuations continuing, particularly if ambitious vendors fail to re-align their asking price to the current more subdued market tone.
The interest rate increased by 0.25 per cent to 0.75 per cent.
On the positive side, as Mark Carney has stuck to his promise of providing forward governance, many lenders had already built in a 0.25 per cent Bank Rate increase to their current product rates, which means that many of the existing competitively priced fixed rate deals are likely to still be available after today, although for how long is anyone’s guess.
Tracker rates will of course rise if linked to Bank of England Base Rate, and Lender Revert Rates and Standard Variable Rates (SVRs) will change too, although it’s within each lender’s wherewithal as to how much of the rise they pass on to these customers, if at all.
The Financial Conduct Authority recently suggested that 34 per cent of all outstanding mortgages in the UK are on a variable rate of some kind, meaning that millions of homeowners are likely to see their mortgage payments rise in the next few weeks due to today’s announcement.
As Brian Murphy, Head of Lending for Mortgage Advice Bureau explained: “As the decision to raise the Bank of England base rate today demonstrates, it would seem that current economic indicators have provided members of the Monetary Policy Committee sufficient evidence to reduce monetary easing to the UK economy.
“The increase in the bank base rate seen this afternoon will have little impact on many new borrowers who’ve probably opted for a fixed rate product, which has been the case for the majority of those taking out new mortgages for quite some time with as many as nine out of ten borrowers in recent years opting for a fixed rate product.”
Brian continued: “However existing borrowers whose mortgages are directly linked to the bank base rate will see a minor increase in monthly repayments as the movement upwards today opens up the possibility for some households to see an increase in their monthly expenditure over the next few weeks.
“For those with a tracker mortgage linked directly to the BOE base rate, for every £50,000 of borrowing on a 20-year term mortgage, the interest rate change today would increase their payments by £6 per month.”
It will take a few months before the data is available to see if the news today has any impact on the number of property purchase transactions.
If there is any immediate negative fall-out from today’s news, this will probably be reflected in buyers’ offers over the next few weeks, providing us with a valuable – and much more immediate – litmus test in terms of consumer confidence in bricks and mortar, and the economy overall.
Follow Louisa on Twitter: @louisafletcher
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