Bank of England Governor Andrew Bailey has warned two thirds of interest rate pain is yet to come for borrowers following the latest rate rise.
The central bank’s Monetary Policy Committee voted 7-2 to raise the base rate by 0.25% yesterday, from 4.25% to 4.5%.
On the flipside Bailey added that inflation should fall rapidly in just a few weeks – with the CPI inflation rate standing at 5.7% in March 2023.
Bailey told Sky News: “We think, in terms of resetting and adjustments, about a third possibly has come through so far…
“There’s quite a large proportion of mortgages yet to reset.”
He added: “We do think that inflation is going to fall, quite rapidly… that doesn’t happen until the April data which will come out in a couple of weeks’ time.”
The latest hike was the 12th consecutive increase, while it brings the bank rate up to 2008 levels.
Nicholas Hyett, investment analyst at Wealth Club. said: “The Bank expects inflation to trend down as major shocks from last year, like the higher oil prices caused by the war in Ukraine, start to drop out of the numbers.
“With inflation falling towards 5% by the end of the year that should take the pressure off wages, and will reduce the chance of inflation getting locked into future expectations.
“Food prices remain a concern, and the Bank has left the door open to further rate hikes, but the worst-case inflationary scenarios now look unlikely.
“The economy is also looking healthier than the Bank had previously forecast, which given it had expected a year long recession not so long ago is a relief. The economy is expected to post modest underlying growth in the first half of this year, and continue to expand into 2024.
“The challenge Andrew Bailey faces from here is keeping a perfect bowl of economic porridge at just the right temperature. Global economic gusts, not least the growling bear of a US banking crisis, are unpredictable.”
Sarah Coles, head of personal finance, Hargreaves Lansdown, explained what the latest rate hike means for mortgage holders.
She said: “For anyone on a variable rate mortgage, there’s no let-up. After 12 consecutive months of rises, if you’ve been on one of these deals for a while, you’ll really be feeling the pain. If you were on a £200,000 tracker mortgage over 25 years, at 5%, and all of this rise was passed on, a 0.25% hike could cost an additional £29 a month – at £1,199.
“Fixed rates, meanwhile, have been busy pricing in a rise over the past couple of weeks, with Moneyfacts showing the average 2-year fix rising very slightly back above 5.3% and the average five-year fix bumping up gently to above 5%.
“It’s hardly a hike to write home about, and puts us back to roughly where we were in the second half of February. However, it means that after months of gradual reductions, aside from small fluctuations, mortgage deals haven’t really fallen for the last couple of months.
“We’re still expecting mortgage rates to end 2023 at a lower level, but clearly the fall is going to be slow and lumpy until we get Bank of England cuts – which is unlikely to be until 2024. For anyone who was hoping that cheaper mortgages would power optimism in the property market, this isn’t great news.
“It means anyone considering getting a mortgage with a small deposit – or even a 100% mortgage – needs to think very carefully about how they would cope if prices fell and pushed them into negative equity. A short-term dip accompanied by long-term home ownership doesn’t have to be the end of the world, but you need to be realistic about what you might be getting into.”
She added: “For those on variable deals, who are wondering whether to fix, this makes life even more difficult. Holding on has been increasingly expensive, and fixed rates have hardly been plummeting in the interim.
“Some people have room in their budget and a willingness to take a risk, so will be happy facing the possibility of one more rise in the hope of falls further down the line. For others, the slow pace of mortgage rate falls will be enough to tip the balance, so they may well give up waiting and take the plunge.”
James Forrester, managing director of Barrows and Forrester, seemed worried about the impact of this latest rate rise.
He said: “It’s clear that the Bank of England’s aggressive approach to managing the economy via a string of interest rates simply isn’t working and it’s the time the government stepped in to make Britain grow again.
“A 12th consecutive increase will do little to stimulate the property market, with buyers left with little choice but to offer less due to the squeeze on affordability. If sellers wish to sell, they also have little choice but to accept the current reality of what their home will fetch in the market.
“However, the real worry is for those coming off a fixed term having previously secured a very favourable rate. The sharp rise they will experience in the monthly cost of their mortgage will be a real source of anxiety and many will be wondering just how they are going to manage.”
