News

Should we expect interest rates to rise?

By Will Leyland, 24 August 2017

There has been speculation that the Bank of England has been considering an interest rate rise since the aftermath of the 2008 financial crisis, and yet here we are with a historically low base rate.

The bank held interest rates at 0.25% earlier this month amid speculation it may be considering a rise. With inflation easing back slightly from 2.9% to 2.6% in June and growth figures slipping last week, another round of wait-and-see was widely expected.

There were six votes for a hold and two for a rise to 0.5% from the Monetary Policy Committee (MPC), and the Bank said it expected the economy to be ‘sluggish’ as higher inflation eats into spending power.

The brakes being applied to the economy by inflation, low wage growth and the negotiations over Brexit remain enough to keep rates on hold - and the Bank outlined market predictions of a rise back to 0.5% in the middle of 2018.

The issue we’re now facing, however, is that inflation is rising, wages are falling and real incomes are dropping, with private debt levels escalating ever higher and savings going through the floor.

Mortgage acceptances, house purchases and other indicators for property buyers are all showing a slowdown as the Brexit reality starts to set in for the majority. If these trends continue then we would have to reasonably consider that the Bank will need to raise interest rates within the next 12 months.

The financial markets had expected just one policymaker, Kristin Forbes, to maintain her previous vote for a rate rise to 0.5%. In the event she was joined by Ian McCafferty and Michael Saunders.

Since the Brexit vote the Bank’s committee of rate-setters has been forced into a balancing act between keeping import-fuelled inflation in check and providing support to the economy as uncertainty and a squeeze on income bites.

According to the Guardian, minutes from the Bank’s rate-setting meeting released on Thursday cited a range of views on the MPC. They noted inflation was now expected to overshoot the Bank’s target by more than previously expected. Supporting those voting for a rate rise, there were also signs that growth in business investment and net trade was on track to make up for weaker consumption.

The minutes added that some policymakers felt it was time to start scaling back the massive package of support launched after last summer’s EU referendum, which included a rate cut and more electronic money printing.

“But there were also arguments in favour of leaving the policy rate unchanged,” they added.

“A slowdown in household consumption, and GDP as a whole, had recently begun, and it was too early to judge with confidence how large and persistent it would prove to be.”

All committee members agreed any rate rises would likely be at a gradual pace and “to a limited extent”.

With this in mind, should landlords be concerned? Not really. With mortgage rates at historic lows, landlords have long enjoyed a low interest vs high rent ratio, and as the bank themselves have noted in the meeting minutes, any rise in interest is likely to be gradual.

We may well see this start to bite into new mortgages and people looking to buy their first home as well as those who have recently bought and stretched themselves too thin. We may see a mild correction in the market as some more housing becomes available but, equally, this will also increase demand for rental properties.

We should expect interest rises in the next 12 months but we should also expect that the effect on landlords will be extremely limited and, on balance, may well be beneficial.

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