The recent decision by the Bank of England to hold interest rates for the second time in a row at 5.25% is testament to the careful consideration being given to the state of our economy. This pause offers some relief to homeowners who have endured 14 consecutive rate rises1, and may signal the end of a challenging period for savers.
That being said, there is still plenty that we need to take with a grain of salt.
Mortgage rates stabilising
For many, the pause in rate hikes will feel like a breath of fresh air. Mortgage rates have previously been on the rise, which puts pressure on homeowners, particularly those coming off a low fixed-rate.
This pause will also provide a momentary reprieve for those on tracker or SVR rates, who have been seeing their monthly payments increase substantially over the past year.
However, interest rates and inflation are a complex issue, and the Bank of England’s unwavering dedication to a 2% inflation target is still set to be a steep climb.
Despite the more positive aspects of the interest rate pause, there is still uncertainty in the UK’s overall economic outlook. The fact that interest rates have been held at their highest level in 15 years underscores the challenging environment we find ourselves in. Inflation currently sits at 6.7%, which is well above the proposed target. With this in mind, the BoE finds itself in a difficult position.
Moreover, the decision to hold off on any rate hikes was not a unanimous one within the Monetary Policy Committee, with six of the nine members voting for a pause. Internal division could be indicative of the complexity of the situation, with varying opinions on the best course of action muddying the playing field.
Decreases in household wealth
We know the slew of rate rises has not been without its consequences, despite the impact it has had on inflation. A report by the Resolution Foundation2 suggests that the hikes have led to a substantial drop in household wealth, primarily due to reduced house prices and pension values.
This decline in household wealth from 840% of GDP in 2021 to 630% in 2023 highlights the potential adverse effects of sticking with prolonged high interest rates. In fact, some argue that maintaining the status quo might not be enough to address pressing issues in the country. Whether it’s families struggling with high prices, increases in the cost of debt, or a rise in unemployment, these are issues which must be addressed.
The issue in inflation
From September 2021 to September 2023, food prices increased by 28.4%3. Previously, it took over 13 years - from April 2008 to September 2021 - for the average cost of food to rise by the same number. The latest update from the ONS puts the CPI at 6.7%, unchanged from August. While this figure is lower than the 11.1% recorded this time last year - a 41-year high - this figure is still painfully high. This is a result of an unpleasant cocktail of economic conditions, many of which also need to be addressed in order to bring inflation down further.
Hope on the horizon
We can still say that in this challenging economic climate, the BoE’s decision to pause interest rate hikes offers a glimmer of hope. It has been a tough journey for both homeowners and savers, and the pause may usher in a period of stability and potential opportunities for those looking to enter the housing market. Lenders may also be encouraged to offer more competitive mortgage rates, and we’re seeing fixed-rates of sub-5% in the market, largely for those with equity in their homes already to put towards a deposit.
For others, however, average fixed-rates remain between 6.2% and 5.15%. What is gratifying is that, according to Rightmove’s report4, we are seeing a drop in average mortgage rates month-on-month.
It’s important to acknowledge that we’re walking through what is inherently a delicate balancing act, and while there are challenges to navigate, the BoE’s role as a guardian of economic stability remains critical. Its decisions will shape the future of the UK’s financial health, and we must hope for a positive outcome.
High interest rates, while sitting within their share of challenges, do serve as a tool to address the pressing issue of inflation, and we believe the path is being charted appropriately in order to steer the economy towards more stable waters.
Commentary from Ben Thompson, Deputy CEO at Mortgage Advice Bureau, cements this for us:
“The hold in interest rates is good news for those with mortgage deals expiring soon, and prospective buyers looking to get onto the property ladder. Another hold is likely a sign that the Bank of England has now concluded this cycle of interest rate hikes. But we mustn’t get complacent. This could very much change in the coming months based on how, and indeed if, inflation continues to fall.
“The mortgage market has already seen drops in the swap rates used to calculate mortgage prices, and there is hope that a second consecutive pause might mean more reductions ahead for homeowners. Prospective buyers and mortgage customers will be relieved by the prospect of a steady rate, and hopefully not too distant reductions in the base rate.
“While there is hope that rates won't rise again, there is a small chance they will, and action now could be more beneficial in the long run. This could be the sign for many homebuyers to take advantage of stable rates before there are further rises.”
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