Interest rates

How high will interest rates go this year?

About a day after I hit the send button to file this column last month, the Bank of England delivered its second interest rate surprise in the space of two months.

The first, you may recall, happened on the eve of Bonfire Night when, with the city poised to raise rates, the Bank sat on its hands, deciding that it wouldn’t. there was then no reason to raise interest rates.

The second came a few weeks later, on December 16.

This time the surprise was in the opposite direction.

Most Bank watchers expected that, with the rise in Covid cases because of the Omicron variant, the Bank would again decide to do nothing, despite soaring inflation.

After all, since its independence in 1997, it had never raised its interest rates in December, perhaps for fear of ruining the Christmases of too many borrowers.

It happened; The discount rate goes from 0.1% – a record level – to 0.25%.

And, while the markets have already been caught off guard, as noted, it is expected to happen again on February 3, with the rate being raised again to 0.5%.

After that, economists are split on whether there will be a single rate hike later in the year, which would bring the rate back to its pre-pandemic level of 0.75%.

Or, as some think, the Bank will be more hawkish than that, with two or three more rate hikes and a year-end level of 1% or 1.25%.

This would be significant, as it would mean that official interest rates have moved out of the narrow range they have been in since the financial crisis.

Since March 2009, when the discount rate was reduced to 0.5% – then a historic low – it has never exceeded 0.75%.

It was not planned at the time.

The members of the Bank’s monetary policy committee, in 2009, thought of establishing an emergency rate level, which would not prevail for more than a decade.

All rates should reach some sort of normal level, maybe not 5% but definitely 2% or 3%, within a year or so.

That hasn’t happened, but it seems likely that, if not this year, rates will soon climb back above their post-crisis lows.

In terms of history, this will always mean that interest rates would still be very low.

Until early 2009, the Bank Rate, which has existed for over 300 years, had never fallen below 2%.

What will higher rates mean for the housing market?

In his last Credit Terms Inquiry, the Bank of England reported that lenders said mortgage availability increased in the last three months of last year and would increase further in the first quarter of 2022.

However, lenders reported an easing in demand for mortgages and expected this to persist early this year.

This is not an interest rate story, but rather the resolution of some of the particular factors that drove the 2021 mortgage, including the stamp duty reduction, which ended on September 30 .

This, as stated here earlier, should pass fairly quickly.

As for interest rates, if they follow the expected trend and only rise moderately, as the financial markets are anticipating, the housing market should be able to withstand the pace.

Mortgage availability, as highlighted by the Bank’s survey, is still good. Competition among lenders will keep mortgage rates low even as official interest rates rise.

A problem would arise if interest rates were pushed up much further.

Older readers, who remember much higher interest rates in the past, will be both constantly amazed at the low rates we have and wondering if we are worried that the Bank Rate may at some point given, reach 3% or 4%.

This would cause a severe indigestion crisis for the housing market.

Thankfully, that doesn’t seem to be on the horizon, at least for the next two years.

Finally, are we seeing the first signs of a realignment of the market?

The story lately has been one of a depressed market in London and everywhere else that is doing quite well.

The last e.surv Acadata House Price Index suggests that this may be starting to change.

The index, which uses land registry data, showed the market remained strong at the end of last year, but the balance has shifted.

Thus, prices in the South East posted an annual increase of 7.6%, behind Wales and the West Midlands. With London just behind at 7.1%.

London and the South East were ahead of East England, South West, North West, North East, East Midlands and Yorkshire & Humber.

This one is to watch and on which I will come back.