More pressure on UK market after 14th rate increase by BoE

The UK property market is braced for a difficult time after the Bank of England raised interest rates for the 14th consecutive time yesterday and signalled that rates would stay “higher for longer”.

Andrew Bailey, Governor, Bank of England

The Monetary Policy Committee increased interest rates by 25 basis points to 5.25%, as expected by economists. It is a softer move than July’s 0.5% rise, but it brings interest rates to their highest level since 2008.

The decision was far from unanimous: six of the nine members of the MPC voted for the quarter-point hike, including the governor Andrew Bailey, two voted for a half-point increase and one wanted to keep rates at 5%.

The BoE hopes the rate hike will help bring inflation, which is currently 7.9%, down to its target of 2%. The UK has the highest rate of inflation in the G7 group of industrialised nations.

Bailey expressed optimism on the outlook for inflation, that according to the Bank will keep going down to 5% later this year and possibly go as low as 3% in 2024, but warned that interest rates will have to stay high to keep inflationary pressures in check over the medium term.

“Given the significant increase in bank rate since the start of this tightening cycle, the current monetary policy stance is restrictive”, the Bank said in a statement.” The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required. The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit”.

The rate increase, and the likelihood of more to come this year, will add further pressure to the UK housing market which is already dealing with soaring mortgage payments and a fall in transactions.

“The biggest impact is on house sales where higher borrowing costs must be immediately factored into any purchase”, said James Richard Sproule, Chief Economist UK, Handelsbanken. “Our house price forecast remains that we will see a nominal fall of approximately 8% peak-to-trough, but the number of house price sales we estimate will decline by 40% from peak to trough”.

The rate rise will have a particular impact on homeowners with a variable mortgage but will also affect potential purchasers. “Rising interest rates are forcing house hunters to be more cautious, review their financial situation and calculate a more conservative budget”, said Matt Thompson, Head of Sales, Chestertons Estate Agents. “Whilst this has recently resulted in fewer new buyers entering the market, we expect activity to pick up again once buyers have adjusted their criteria and lenders are bringing more products to the market again”.