An Interest Rate Hike is Coming, Bank of England Warns

Although the Bank of England (BoE) voted to keep its base rate at 0.5% yesterday, it warned that an interest rate hike is coming from as early as May and that there are more to come, as the economy accelerates with help from booming global growth.

The Bank said that it would need to raise rates to tackle stubbornly high inflation “somewhat earlier and by a somewhat greater extent” than it had anticipated towards the end of last year.

While the BoE’s rate-setting Monetary Policy Committee (MPC) voted unanimously to leave the base rate at 0.5% this month, the tone of its discussion suggests that the cost of borrowing will not remain this low for much longer.

The Governor of the BoE, Mark Carney, had previously suggested that there could be two further rate hikes to curb inflation over the next three years, but speculation will now mount over the chance of additional rate increases.

Ishaan Malhi, the CEO and Founder of online mortgage broker Trussle, responds to the news: “We may not see another interest rate rise for a few months, but it’s looking like it won’t be long before mortgage rates begin to climb. Low interest rates and Government subsidies have encouraged banks to lend, but the days of cheap credit could be numbered. The Term Funding Scheme, which has propped up lending to the tune of £100 billion in the last 18 months, comes to an end this February and may well have a knock-on effect on mortgage rates.

“For hopeful first time buyers and existing homeowners looking to switch mortgage, using this window of time to lock in a low fixed rate deal could prove a wise move which could save thousands of pounds in the long-term.

“It’s important to remember though that headline rates are not the be-all-and-end-all. They can often be a red herring, which distract people from the true cost of the mortgage, once all charges and incentives are considered.”

Rob Clifford, the Commercial Director at property specialist SDL Group, also comments: “I think it’s likely that a hike in rates will happen a shade sooner than first anticipated, but I question if that is going to have the negative impact many fear.

“With inflation currently at 3%, well above the MPC’s 2% target, it’s inevitable that the BoE will consider a further rise in rates to try to curtail the pace of inflation. It’s something that’s going to happen and, arguably, all of the signs suggest that it’s a move consumers are anticipating.

“You only need to consider the rise in the number of remortgages we’re seeing compared to purchase mortgages. One buy-to-let mortgage lender shared with us recently that, whereas the historic split had been closer to 50/50, it’s business mix at the moment is over 85% remortgage. This is just one barometer of how consumers are feeling about the likelihood of rates rising – they dive into a better rate and often a fixed rate deal. Many in the market predicted a growth in remortgage volumes, but not quite as stark as we’re seeing.

“It doesn’t matter whether you are considering the residential or the buy-to-let market, the fact remains the same that consumers want interest rate certainty and the best deal they can get. Consumers are preparing for a rise and they’re quite literally getting their financial house in order.

“Notwithstanding many consumers taking sensible action ahead of the potential rise, my opinion is that this isn’t going to have a major impact on the mortgage and property market as whole, because it isn’t mortgage rates and the consequent monthly affordability that’s causing a bottle-neck. The major barriers are the capital required for the initial deposit and availability of housing stock. A further rise in interest rates isn’t going to change those key constraints and I therefore can’t see it having a material impact on housing transactions.”