The Bank of England is expected to raise interest rates again this week as part of its bid to tackle inflation, but it could be reflective of a ‘new normal’ for the UK.
Despite new Prime Minister Rishi Sunak not revealing the details of his new economic strategy until mid-November, the Bank of England Monetary Policy Committee (MPC) will meet on Thursday to decide whether to increase the base rate further.
It currently sits at 2.25%, after seeing some record-breaking rises over recent months as the Bank has made attempts to control inflation and regain some stability. Many are betting on a 0.75 percentage point increase this week, which would be the biggest hike in more than 30 years.
As the public wonder where these hikes to interest rates will end, which are impacting mortgage and borrowing costs and therefore the housing market, most traders are forecasting the base rate reaching a peak of 4.75% next summer.
Interest rates entering a new landscape
According to Knight Frank, it is “extremely unlikely” that interest rates will return to the lows we have become accustomed to over the past 15 years since the financial crisis of 2008.
“We are entering a new monetary policy landscape,” says the estate agency. “Psychology and business models will have to ‘rebase’ to this new monetary world which will take some time after the market settles.”
This means that lenders as well as borrowers will need to adapt and reassess what they are able to take on, taking into account mortgage affordability. Knight Frank states that households with a fixed budget would have seen a 25% cut in the amount they could borrow because of September’s repayment increase.
Inflation will be the deciding factor on whether rates rise further, and how high. Historically, points out Knight Frank, the Bank of England has not continued raising interest rates while house prices fall.
Political outlook will be important
Knight Frank adds: “After the U-turns and now appointment of Rishi Sunak, calmer markets are now looking towards a maximum [base rate] of around 5%. The ‘unpredictability premium’ in the wake of the mini-budget (the jump in expectations) has almost been eroded with the latest forecast near where they were on 21st September.
“Yet, Sunak may be looking to peel more of this rise and move towards where the market was at the end of August. The unveiling of his fiscal plans on 17th November will add more clarity.”
Overall, interest rates are expected to flatten out by early 2024. While they are unlikely to return to the lows of before, which many thousands of people have benefited from in some ways, they are expected to stabilise, which will be welcome news in the housing market.
House prices won’t hit double-digit falls
Rising mortgage rates will undoubtedly put some pressure on the housing market, as affordability becomes more strained for many households. However, Tom Bill of Knight Frank does not believe we will experience a crash akin to the 2008 crisis.
In fact, the forecast is that house prices will return to where they were in the summer of 2021, after a frenzy of activity and a major surge in prices being paid post-Covid, while interest rates remained low.
Bill says: “Once there is relative stability, the UK housing market can enter a second and more predictable phase. More certainty will underpin transaction volumes but not necessarily prices. In fact, higher trading volumes would only hasten the price correction we expect will take place.
“As mortgage rates normalise and more people roll off five-year fixed-rate deals, this will continue to put downwards pressure on prices… [but] low levels of unemployment and well-capitalised banks mean we do not expect the sort of double-digit price declines seen during the global financial crisis.”
