Last week Zoopla raised concerns about the Bank of England over-reacting to high inflation by potentially raising the base rate too rapidly.
It certainly has been a punishing year for the nation’s mortgage holders, as the base rate currently sits at 4.5% after 12 consecutive increases, while the markets apparently expect it to go to 5.5%.
Indeed, according to new research it costs 38% more to remortgage than in 2019.
While I agree that the Bank could do well to slow down the rate of increases from now on, I think the shock at the interest levels is mainly down to them being too low for too long.
Thanks to the fallout from the global financial crisis, then the economic hit of Brexit, combined with the unforeseen global pandemic, the Bank did all it could to harbour economic growth – with a debt-driven approach.
But it ultimately went too far. Rather than having some years of lower growth ever-lower interest rates fuelled growth at the price of inflation, putting the UK in a fragile position to deal with issues like the energy crisis.
I remember being warned about the UK’s economic health in 2016 when seeing a speech by the current ITV News political editor Robert Peston, who branded the economy “unhealthy”.
He said at the time: “I am profoundly concerned. I said to you the City is surprisingly relaxed about the degree of uncertainty; they’re relaxed because they believe that whenever we will hit any bump in the road the Bank of England will take evasive action – funnel money through the banks, cut interest rates, create new money through quantitative easing, purchase new assets.
“That is fine a as short-term painkiller. It is not a long-term way to run an economy.”
Now, it seems to me, mortgage holders are bearing the brunt of the end of these short-term painkillers.
The positive of course is mortgage stress testing was introduced after the global financial crisis, so the prospect of people losing their homes seems less worrisome than it could have been.
But I’m sure many will be feeling the pinch, both owner occupier and investor alike – and correspondingly renters.
We’re in a situation now where I think rates need to be left alone wherever possible to help people adapt to this new normal.
Remember, prior to the global financial crisis a base rate of around 5% was very normal.
We likely got too comfortable with the Bank of England cutting the base rate at the drop of the hat, and now it’s time to let these changes bed I’m.
I think once expectations are realigned, we’ll continue to have a property market with a strong flow of transactions.
