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