Why BOE base rate to fall so slowly?

Jaco70

Full disclosure, I have interest only BTL mortgages and it’s stinging. I’m certainly not complaining or seeking sympathy, just stating a fact. I’ve had plenty of decent years before this.

The base rate has increased 12 times in around 18 months, and it looks like more are on the cards.
I understand why they’ve risen, as inflation hit 10%, five times the target, but I ignorantly assumed that when inflation fell, the base rate would plummet. So I was happy to hold on to my seat.

All the predictions I’ve read put paid to this theory. Opinions differ but one I read suggested just a 1% fall over the next five years. The predictions seem pretty much in line with each other, but lack an explanation as to why rates won’t drop back down low.

weddingringman

I think the base rate will hit 5.5% without question. 6.5% seems likely also. Could it peak briefly at 7 or 7.5%? Yep, easily. That might not result in mortgage rates hitting those heights though. 

The Bank of Englands inept reaction to what was happening 2 years ago has prolonged this mess…

Andrew ‘Inflation is transitory’ Bailey and his incompetent committee didn’t react, and when they did it was pitiful 0.15 to 0.25% rises. I think the cost of Brexit has been grossly underestimated, namely the cost in importing the vast amounts of food, goods and services we rely on from abroad. I just can’t see that settling down any time soon. 

dunstonh

The base rate has increased 12 times in around 18 months, and it looks like more are on the cards.

Yep. Possibly to 7% as historically, interest rates have had to go higher than the core inflation rate which is currently 6.7% to get control over it.

I understand why they’ve risen, as inflation hit 10%, five times the target, but I ignorantly assumed that when inflation fell, the base rate would plummet. So I was happy to hold on to my seat.

Inflation is going to take a long time to get under control.   The consequences of the 2008 credit crunch kept being kicked down the road but when QE ended, it was always predicted that inflation would rise. It coincided with a number of other inflationary events.   And when they do peak out and fall, they are not going to go back to where they were as they were at historical all time lows.  They will stay lower than long term average but not as low as they were.  Central banks need to have the ability to lower rates in their armory again when the economy calls upon it.

Silvertabby

The long term norm is 5%.  It's the ultra low levels over the past few years that were the anomaly, not the recent increases.

sevenhills

Rising interest rates take money out of the economy, too much money in the economy is what is driving inflation.
The trouble is that people still feel good and are spending, giving more pension tax breaks helped that.
Falling house prices may see people thinking that they are getting poorer and stop spending.

Jaco70

dunstonh said:

The base rate has increased 12 times in around 18 months, and it looks like more are on the cards.

Yep. Possibly to 7% as historically, interest rates have had to go higher than the core inflation rate which is currently 6.7% to get control over it.

I understand why they’ve risen, as inflation hit 10%, five times the target, but I ignorantly assumed that when inflation fell, the base rate would plummet. So I was happy to hold on to my seat.

Inflation is going to take a long time to get under control.   The consequences of the 2008 credit crunch kept being kicked down the road but when QE ended, it was always predicted that inflation would rise. It coincided with a number of other inflationary events.   And when they do peak out and fall, they are not going to go back to where they were as they were at historical all time lows.  They will stay lower than long term average but not as low as they were.  Central banks need to have the ability to lower rates in their armory again when the economy calls upon it.

Thank you for your reply. I agree with you regarding inflation taking a long time to get back down, but I clearly remember Jeremy Hunt saying, during his mini budget or whatever it was called, that it could be between 3 and 4% by the end of 2023. Nobody is saying that now, and he doesn't seem to be commenting on why his forecast was way out.

Jaco70

Thank you for the replies, which make a lot of sense.

Basically what I take from it is that this is a correction (caused by events, but still a correction), and so the BOE sees no reason to get the base rate back down to historic lows, and may in fact be happy to get them back up.

The upshot will surely be a drop in house prices (people will inevitably predict a 30 to 40% fall, but it won't be) and a lot of people getting out of BTL, which both sound good for young people and first time buyers, but if their mortgage offers are now much higher I am not sure it will help them that much.

My intention was always to stay in BTL for the long-term, and I have a reasonable amount of equity in the properties and in my other, unrelated, business, but I'm not sure it will be possible if rates don't come down. I think disposing of at least some will become a necessity. However, it was always only a plan to stick with BTL, as I know you can't control or predict events (to paraphrase McMillan, lol).

MattMattMattUK

Jaco70 said:

dunstonh said:

The base rate has increased 12 times in around 18 months, and it looks like more are on the cards.

Yep. Possibly to 7% as historically, interest rates have had to go higher than the core inflation rate which is currently 6.7% to get control over it.

I understand why they’ve risen, as inflation hit 10%, five times the target, but I ignorantly assumed that when inflation fell, the base rate would plummet. So I was happy to hold on to my seat.

Inflation is going to take a long time to get under control.   The consequences of the 2008 credit crunch kept being kicked down the road but when QE ended, it was always predicted that inflation would rise. It coincided with a number of other inflationary events.   And when they do peak out and fall, they are not going to go back to where they were as they were at historical all time lows.  They will stay lower than long term average but not as low as they were.  Central banks need to have the ability to lower rates in their armory again when the economy calls upon it.

Thank you for your reply. I agree with you regarding inflation taking a long time to get back down, but I clearly remember Jeremy Hunt saying, during his mini budget or whatever it was called, that it could be between 3 and 4% by the end of 2023. Nobody is saying that now, and he doesn't seem to be commenting on why his forecast was way out.

Everyone, including the government, underestimated how much inflation has become embedded and how much external inflation has transferred to core inflation. Increased costs flowed through the supply chain and suppliers have absorbed less of those that I think the government expected them to, wages have risen slightly more than expected, the full costs of Brexit are impacting the cost of importing goods. It now looks as if inflation in the 6-8% range by the end of 2023 would be a good outcome, it could well be above that, which is why the government has started saying that it would be comfortable with a recession if that meant getting inflation under control. 

Additionally the BoE will have to continue raising interest rates not because of inflation but because of the Fed and ECB, if they keep raising rates then the BoE will need to carry on as well, if they stop then that takes much of the pressure off future rate rises, although we still look likely to see 5.25-5.75% as a peak later this year before the stabilise and then start to come down in the latter half of 2024, if we are lucky we might get 3% again by late 2025, unless of course we overshoot and end up with a recession and deflation, in which case we really are in a mess. 

dunstonh

The trouble is that people still feel good and are spending, giving more pension tax breaks helped that.

There has been no change in the pension tax rules apart from the LTA but that won't have made any difference.

Thank you for your reply. I agree with you regarding inflation taking a long time to get back down, but I clearly remember Jeremy Hunt saying, during his mini budget or whatever it was called, that it could be between 3 and 4% by the end of 2023. Nobody is saying that now, and he doesn't seem to be commenting on why his forecast was way out.

You cannot predict the unpredictable.  The modelling suggested that as energy costs fell, the rate of inflation would fall.  However, other issues have kept it higher.   However, the UK economy, is more prone to inflation given its industry make up.

MattMattMattUK

Jaco70 said:

Thank you for the replies, which make a lot of sense.

Basically what I take from it is that this is a correction (caused by events, but still a correction), and so the BOE sees no reason to get the base rate back down to historic lows, and may in fact be happy to get them back up.

It is not a correction as such, rates were too low at the sub 1% rates, but they are also too high at the greater than 4% rate, in the medium term they probably need to settle around 2-2.5%. At the moment the BoE has little room for manoeuvre, inflation is too high but more importantly it has to defend Sterling and keep rates roughly comparable to US and Euro rates otherwise Sterling will loose value and that will make inflation even worse. However the BoE is also conscious that there will likely be a rebound and deflation at some point, going higher than they need to will make that worse when it happens. Higher interest rates are also bad for the wider economy as they discourage investment as the safe rewards of interest approach the riskier rewards from investment. 

Jaco70 said:

The upshot will surely be a drop in house prices (people will inevitably predict a 30 to 40% fall, but it won't be) and a lot of people getting out of BTL, which both sound good for young people and first time buyers, but if their mortgage offers are now much higher I am not sure it will help them that much.

There are always going to be people desperate for a crash, but house prices are largely propped up by an imbalance between supply and demand rather than mortgage interest rates. Affordability impacts some people, but £200k @ 1.% is cheaper than £140k @ 5% and the latter also sucks tens, potentially hundreds of billions out of the economy. 

Jaco70 said:

My intention was always to stay in BTL for the long-term, and I have a reasonable amount of equity in the properties and in my other, unrelated, business, but I'm not sure it will be possible if rates don't come down. I think disposing of at least some will become a necessity. However, it was always only a plan to stick with BTL, as I know you can't control or predict events (to paraphrase McMillan, lol).

The obvious question is why not increase the rent you charge? Rents are going up everywhere, the rises in rent are far outstripping the rises in base rate or inflation. 

Jaco70

MattMattMattUK said:

Jaco70 said:

Thank you for the replies, which make a lot of sense.

Basically what I take from it is that this is a correction (caused by events, but still a correction), and so the BOE sees no reason to get the base rate back down to historic lows, and may in fact be happy to get them back up.

It is not a correction as such, rates were too low at the sub 1% rates, but they are also too high at the greater than 4% rate, in the medium term they probably need to settle around 2-2.5%. At the moment the BoE has little room for manoeuvre, inflation is too high but more importantly it has to defend Sterling and keep rates roughly comparable to US and Euro rates otherwise Sterling will loose value and that will make inflation even worse. However the BoE is also conscious that there will likely be a rebound and deflation at some point, going higher than they need to will make that worse when it happens. Higher interest rates are also bad for the wider economy as they discourage investment as the safe rewards of interest approach the riskier rewards from investment. 

Jaco70 said:

The upshot will surely be a drop in house prices (people will inevitably predict a 30 to 40% fall, but it won't be) and a lot of people getting out of BTL, which both sound good for young people and first time buyers, but if their mortgage offers are now much higher I am not sure it will help them that much.

There are always going to be people desperate for a crash, but house prices are largely propped up by an imbalance between supply and demand rather than mortgage interest rates. Affordability impacts some people, but £200k @ 1.% is cheaper than £140k @ 5% and the latter also sucks tens, potentially hundreds of billions out of the economy. 

Jaco70 said:

My intention was always to stay in BTL for the long-term, and I have a reasonable amount of equity in the properties and in my other, unrelated, business, but I'm not sure it will be possible if rates don't come down. I think disposing of at least some will become a necessity. However, it was always only a plan to stick with BTL, as I know you can't control or predict events (to paraphrase McMillan, lol).

The obvious question is why not increase the rent you charge? Rents are going up everywhere, the rises in rent are far outstripping the rises in base rate or inflation. 

With regard to the increasing rent question, I am minded to try to keep good tenants and always have been. Obviously now though, when I try to keep rent increases low, people are staying put for much longer. Its a double edged sword and I should probably be more ruthless, but telling a young mum that her rent is going up 150 a month, when her pay/benefits aren't just doesn't sit comfortably.

I'm not being altruistic but sometimes its hard to see things totally clearly, and I'm also wary of getting more rent from somebody else, but also buying a load of hassle in the form of awkward, or rent-avoiding, tenants.