BoE thinking

Geoffw27

Can anyone explain to me how raising interest rates, which will increase mortgages will help inflation now, as 8 out of 10 mortgages are fixed rate?
surely the immediate effect will be negligible.. 

Herzlos

The end dates from the fixed rate terms will be fairly well distributed, so whilst it won't impact all the mortgages holders at once, it will over the next 5 years.

A looming rate rise will also cause a lot of people to change their spending habits since they'll be preparing for the hike either by trying to build up some savings, reduce outgoings, or bring their LTV down a tier.

Of course, if people stop spending money then we'll end up in a recession. We could easily see a point where we're in a recession but still facing a spiraling cost of living crisis.

RogerPensionGuy

Geoffw27 said:

Can anyone explain to me how raising interest rates, which will increase mortgages will help inflation now, as 8 out of 10 mortgages are fixed rate?
surely the immediate effect will be negligible.. 

If people feel inflation is likely to stay at these elevated rates people can tend to buy stuff now as it will be more expensive later and these activities will actually raise or hold inflation at these high rates.

There's a lot of press about mortgage rates, my understanding is that the 1% or 2% mortgage rates train the last 10 years was always going to stop and now it has, guessing long term mortgages rates will be more like in the 4.25 to 5.5% range after 2026 and stay at these levels for decades. 

If mortgage takers were not informed advised rates may go up to 6 or 7% in the future, maybe this will be another miss selling scandal?

london21

Some fixed term will be ending. Mine ending 02/2024

Not sure when the increase stops but lots of people will be affected.

Herzlos

RogerPensionGuy said:
If mortgage takers were not informed advised rates may go up to 6 or 7% in the future, maybe this will be another miss selling scandal?

Nah, mortgages have been stress tested against big rate hikes for a while now, and I think there's always been some warnings about rates going up or down in the future.

What would you claim is the miss-sold?

fiish

While mortgages have been stress tested against big rate hikes, the stress testing may have assumed a more stable, and likely lower, rate of inflation than we have experienced in the past year. So if interest rates were where they are today but inflation was still around 2% (basically assuming that interest rates are being raised for some other reason), then the stress test results would be more valid.

What we have now is a double affordability squeeze on mortgage holders, where both their mortgage payments and other expenses are going up significantly.

hildosaver

My own thoughts on this are that the BOE and the government realise that the only way out of the inflation is to enter a recession and they are hoping this will happen in part due to these increases in interest rates.

adamL

I should be one of those hugely effected by this interest rate hike but I’m not. My spending hasn’t changed even with a looming rate increase from 1.08% to 3.93% (fixed about a month ago for a start in November). That results in a £500pcm increase. If anything, because this time I fixed for 5 years, I am confident that on a month by month basis, due to yearly pay rises, we will only be about £200 a month down in year 1, and in years 2-5 we will be better off than now. I will see what I can do with savings accounts to offset this £200 a bit more in year 1. 

Our mortgage when taken out in 2019 was 4.5 joint income - £500k borrowed. There’s plenty of excess money sloshing around with enough for about 6 holidays a year. 

Scorpio33

1) In theory, the higher interest rates will mean higher savings rates, encouraging more people to save
2) Mortgages are not the only form of borrowing. This will mean less loans, credit cards etc so less spend overall in the economy.
3) Even if people are on a fixed rate, those fixed rates come to an end (2.4m in 2024 - https://www.theguardian.com/money/2023/jun/17/uk-homeowners-face-huge-rise-in-payments-when-fixed-rate-mortgages-expire) , which will mean higher rates for them, and less spend in the economy.
4) This also makes in harder for businesses to borrow money, meaning they will borrow less (and so spend less).

All the above points to lower spend, so lower inflation.

The other aspect is that lower spend could mean lower profits, and so a recession. It is a balancing act.

TheChangeIsCast

Geoffw27 said:

Can anyone explain to me how raising interest rates, which will increase mortgages will help inflation now, as 8 out of 10 mortgages are fixed rate?
surely the immediate effect will be negligible.. 

One of the primary areas where interest rate rises will help inflation is with imports. As a nation we are a net importer, which means we import A LOT, especially food. As interest rates increase, generally the strength of our currency also increases, which makes everything we import cheaper, especially anything traded in $ as the $ is currently strong.

Another area is with sentiment. The side effect of normalising interest rates is that we are almost nailed on for a large recession now. Recessions mean much reduced demand all around, which equals a drop in inflation overall. For example, unions and people don't tend to push for pay rises in a recession as they fear for their job security.

Another area it will help, although longer term, is if interest rates stay at these normal levels (which I think they will), house prices will drop significantly, in both real and nominal terms. 15 years of low interest rates and money printing (QE) have pumped up asset price bubbles all over the world, because all of that printed funny money had to go somewhere to get a return (in a low interest rate environment), and that somewhere has been into asset (including houses) prices. Now the props of ultra low rates and QE are being removed, these asset price bubbles have to, and will deflate. The size of the drop nobody knows, my own hunch maybe 10-20% in nominal terms over the next few years, but possibly a lot more in real terms, when you factor in wage increases, inflation etc. This is obviously bad news for anyone who's over extended themselves over the past 15 years and taken on too much mortgage debt, but overall for the country, big picture-wise, a significant fall in house prices (vs average income levels) is amazing news. House prices perpetually increasing to ever more ridiculous income multiples was never sustainable, and by definition anything not sustainable, cannot and will not continue forever.

I feel a lot of sympathy for people who do come into difficulties, as the general advice for the past 15 years has been to take on as much mortgage debt as possible, never been a better time to borrow etc especially as savings weren't generating any interest, so you might as well borrow to kingdom come. I always viewed it the other way around, and thought that there will never be a better opportunity in my life time to pay down mortgage debt whilst it's cheap, and so that's what I did, knowing that historically low interest rates and QE couldn't continue forever

kingstreet

Interest rate hikes to cure supply-side inflation. It's barmy.

Still, there's more chance of seeing Lord Lucan riding Shergar than there is them accepting the "B" word might be the issue...