“Mortgage holders need to prepare for more pain ahead”
Garry White, chief investment commentator at Charles Stanley, says: “Mortgage holders need to prepare for more pain ahead, as persistently high inflation means even more interest rate rises are likely in the coming months. Markets are now pricing in interest rates hitting 6% by the end of the year, though this could be an overly hawkish stance. Rising mortgage rates, coupled with continuing price rises in goods and services, will act as a sharp brake on the UK economy, as households rein in spending.
“The impact of the mortgage squeeze on consumer incomes will lead to the underperformance of UK growth compared to the more favourable GDP growth forecasts that have emerged.”
Big surge in rent prices to come?
Polly Ogden Duffy, managing director at John D Wood & Co predicts a major increase in rent prices as the latest interest rate hike prompts more landlords to leave the market.
“As interest rates continue to rise and mortgage rates comes to an end, we are tipping the ballasts where we are seeing more and more landlords having to fund their buy-to-lets to break even,” she said. “If these landlords can sell, chances are they will sell and that in turn will drive rents up due to less supply.
“It is hard to find many incentives to become a landlord with a mortgage in this environment.”
Church of England to divest from fossil fuel companies
The Church of England is pulling its investment from fossil fuel companies because they are failing to align with the Paris Agreement, the Archbishop of Canterbury has said.
By the end of the year, the Church said it will have removed its £10.3 billion endowment fund from all oil and gas companies unless they are in genuine alignment with limiting global temperatures to 1.5C above pre-industrial levels.
BP, Ecopetrol, Eni, Equinor, ExxonMobil, Occidental Petroleum, Pemex, Repsol, Sasol, Shell, and Total will be excluded from the Church’s investments, joining 20 others that were excluded in 2021.
Mortgage advisor: ‘Bank of England governor has lost his mind’
Samuel Mather-Holgate of mortgage advisory firm Mather & Murray Financial was deeply critical of the Bank of England’s decision.
“The Bank of England governor has lost his mind,” he said. “This rate rise will tip the UK into a severe, protracted recession.
“These rate rises have battered homeowners and renters, as mortgage rates push up rents. It makes no logical sense as it’s a proven failed policy of trying to handle inflation caused by supply shocks. Sunak should have Bailey’s P45 in the post tonight.”
What if all this interest rate pain brings no gain on inflation?
When Rishi Sunak first started pledging that he would halve inflation by the end of the year, it must have seemed a no-brainer.
The level of inflation isn’t in his gift; he can nudge it perhaps, but it’s really down to the Bank of England and consumer behaviour.
But that didn’t matter. Few people would get that point and the Bank’s action on interest rates meant inflation was bound to fall. Easy win, he thought.
Shares sink lower on 5% rates call
The FTSE 100 sank lower and is now down more than 1% for the day following the Bank of England’s decision to hike rates to 5%.
MPC signals willingness to hike again
Ruth Gregory, deputy chief UK Economist at Capital Economics, who correctly predicted the half-point hike, said another hike is likely on the way,, but predicts that rates will peak at 5.25%, significantly below City expectations.
She said: “By saying once again that ‘the risks around the inflation forecast are skewed significantly to the upside’ and that ‘if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”’ the MPC signalled its willingness to raise rates again should inflationary pressures remain strong.
“The Governor Andrew Bailey, also stated in a letter to the Chancellor his intention to do what is necessary to return inflation to the 2% target, suggesting the Bank will continue hiking rates if the data warrant it. That said, the Bank has not committed to raising rates again or said that 50bps are once again the norm.”
Traders up bets on higher Bank of England peak rate
City traders have upped their bets on higher terminal rates, after today’s decision from the Bank of England.
Before the latest call, markets had priced in around a 70% chance that rates peak at 6% or higher, but now see around a 90% chance of rates hitting that mark, which would be the highest since 1999.
Markets also predict a more than 40% chance that rates rise as high as 6.25%.
That has sent short-dated gilts slightly upwards, back towards Monday’s 15-year highs.
Yields for gilts, however, are down, in a sign that the City thinks Threadneedle Street could bring rates back down again sooner than previously thought.
“The wage-price spiral won’t break itself”
George Lagarias, Chief Economist at Mazars, says the half-point rise is the right call:
“A double rate hike was appropriate following yesterday’s bad inflation number. The wage-price spiral won’t break itself. The central bank’s move is a step towards the right direction. Unfortunately, from where we are today, there aren’t many good options.
“The UK is in a vicious inflation cycle plain and simple. Unless demand is decisively curtailed, there’s a real danger that inflation will get out of hand. Make no mistake, this means significant pain for consumers. The government could step up to alleviate pressures in the labour market and increase housing availability, which should help diffuse the inflation bomb faster. Presently, markets are discounting four more rate hikes, a one percent higher rate by the end of the year.”
Bailey: “We know this is hard”
Bank of England governor Andrew Bailey offered some sympathy for mortgage holders as the Bank of England hiked rates to 5%: “We’ve raised rates to 5% following recent data which showed that further action was needed to get inflation back down.
“The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it. We know this is hard – many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later. We are committed to returning inflation to the 2% target and will make the decisions necessary to achieve that.”
