First-time buy­ers beware: this rate rise could be just the start

The Observer - - BUSINESS -

House own­ers, and would-be house own­ers, beware. Change is com­ing. The ma­jor­ity on the Bank of Eng­land’s mon­e­tary pol­icy com­mit­tee against rais­ing in­ter­est rates seems huge, con­firmed at 7-2 last week. But the lan­guage is tight­en­ing around the na­tion’s fi­nances.

Spare ca­pac­ity in the econ­omy – un­filled jobs and un­spent money – is be­ing whit­tled away more quickly than pre­vi­ously thought and in­fla­tion is still likely to over­shoot its 2% tar­get over the next three years. Yes, wage growth is run­ning be­low an in­fla­tion rate that has now hit 2.9%, but all signs now point to that 7-2 split flip­ping the other way come Novem­ber.

As the Bank said, “some with­drawal of mon­e­tary stim­u­lus is likely to be ap­pro­pri­ate over the com­ing months”. This was firmed up the fol­low­ing day by Gert­jan Vlieghe, pre­vi­ously the most anti-rise MPC mem­ber, when he said the bank was “ap­proach­ing the mo­ment” for an in­crease.

Mar­ket pun­ters now think there is a 42% chance of a rise in Novem­ber, and more than 50% in De­cem­ber. The cur­rent split on the MPC masks the weigh­ing of trade-offs – be­tween eco­nomic growth and in­fla­tion, postre­f­er­en­dum sta­bil­ity and curb­ing con­sumer debt – which is ever del­i­cate and close to a tip­ping point.

A rate rise from 0.25% at present to 0.5% would merely rep­re­sent a re­turn to the pre­vi­ous record low, which had lasted from 2009 to the EU vote. But what should sharpen bor­row­ers’ minds is the thought of fur­ther in­creases – as hinted by Vlieghe. In­fla­tion re­mains stub­bornly high; some­thing will have to be done to tem­per a con­sumer lend­ing surge grow­ing at 10% a year.

House­holds might cope with a move to 0.5%, but if a rate in­crease au­gurs a sus­tained move against cheap bor­row­ing and per­sis­tent in­fla­tion, then a wider re­think of am­bi­tions, from get­ting fur­ther up the hous­ing lad­der to buy­ing a new car, will be needed. And for those not on the hous­ing lad­der, hopes of a step up could be ex­tin­guished al­to­gether.

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