Base rates will increase again

sevenhills

With the Fed increasing interest rates today, it looks very certain that the Bank of England will increase rates again on Thursday 3 August, by 0.25 or 0.50?

There is always speculation about the most recent increase being the last increase, but it's also about the strength of Sterling and the expectations of the market.

housebuyer143

I thought it was a certainty anyway? 

Nebulous2

I'd say 0.5% is very unlikely - but 0.25% is pretty much baked in. 

It will be interesting to see what future guidance they give. As I understand it the Fed have refused to give any, saying they are going to take it meeting by meeting. 

I'm still doing my own observations of hospitality and tourist spots, and can't see many signs of people holding back. A touring circus near us had to put on an extra show recently, as they were so busy. Recent meals out - restaurants have been very busy, but not generally full, which they were a few weeks ago. 

Data coming through seems to suggest spending is more cautious than it has been, so that may be a positive sign. 

That inflation figure is still obstinately high. 

nic_c

Last time the BoE committee either voted hold or 0.5, no one went 0.25. Agree it's going to be at least 0.25, but with the stubborn inflation rates and the Fed announcement, you might wonder if they are attracted to another 0.5? 

InvesterJones

sevenhills said:

There is always speculation about the most recent increase being the last increase

I didn't hear anyone suggest the last increase was the final one - I think it was universally understood there would be more. At the time, it was assumed a 50bp increase in August, then with the lower inflation read in July it was 25-50bp.

Exodi

InvesterJones said:

sevenhills said:

There is always speculation about the most recent increase being the last increase

I didn't hear anyone suggest the last increase was the final one - I think it was universally understood there would be more. At the time, it was assumed a 50bp increase in August, then with the lower inflation read in July it was 25-50bp.

Agreed, I think most of the forecasts I saw even predicted another increase after the assumed increase next week.

Nebulous2 said:

I'm still doing my own observations of hospitality and tourist spots, and can't see many signs of people holding back. A touring circus near us had to put on an extra show recently, as they were so busy. Recent meals out - restaurants have been very busy, but not generally full, which they were a few weeks ago. 

This is the same as in my experience, but I'd imagine it's because increasing interest rates as a means to counter-inflation disproportionately effects those with the largest debt - e.g. mortgages. As most houses are owned outright and less than a third are owned with mortgages, less than a third of households will be truly absorbing the blow of interest rate hikes. Martin Lewis directly asked Jeremy Hunt whether it was his intention to make mortgage holders bear the brunt of inflation (though as you can expect he skillfully dodged the question and began talking about the energy price guarantee).

Now couple this with the fact that most UK mortgages are held with fixed term promotional periods and you are left with the current situation where the majority of mortgage holders are still cruising on fixed 1-2% interested rates. I'm (fortunately?) in this group for now.

Fixed term deals expiring since the BoE started increasing interest rates:

https://www.theguardian.com/money/2023/jun/17/uk-homeowners-face-huge-rise-in-payments-when-fixed-rate-mortgages-expire
 
I expect you'll start seeing less and less mortgage holders out for meals or at touring circuses as interest rates remain high and more mortgages fall out of their fixed terms. It seems many mortgage holders will soon be faced with the prospect of remortgaging from 2% to 6% and while be possibly £500 a month worse off.

thegentleway

Exodi said:

Nebulous2 said:

I'm still doing my own observations of hospitality and tourist spots, and can't see many signs of people holding back. A touring circus near us had to put on an extra show recently, as they were so busy. Recent meals out - restaurants have been very busy, but not generally full, which they were a few weeks ago. 

This is the same as in my experience, but I'd imagine it's because increasing interest rates as a means to counter-inflation disproportionately effects those with the largest debt - e.g. mortgages. As most houses are owned outright and less than a third are owned with mortgages, less than a third of households will be truly absorbing the blow of interest rate hikes. Martin Lewis directly asked Jeremy Hunt whether it was his intention to make mortgage holders bear the brunt of inflation (though as you can expect he skillfully dodged the question and began talking about the energy price guarantee).

Isn't that fair though seeing as inflation benefits those with largest debt since the value of the debt is shrinking? And the savers are paying for inflation as the value of their savings is being decimated. It's only really an issue if mortgage holders can't service their debt, hence the importance of stress testing affordability.

MattMattMattUK

Nebulous2 said:

I'd say 0.5% is very unlikely - but 0.25% is pretty much baked in. 

I agree, but I also view that as unfortunate. They are ultimately going to keep raising rates, better to get the rises over and done with, let the impact kick in and then the benefits of inflation dropping and being able to subsequently lower interest rates will also kick in quicker. It seems that the BoE's strategy has been to be behind the curve and drag things out, they need to get in front of the curve and make an impact, either that or the government needs to step in and raise taxes to compliment the rate rises in reducing inflation. 

boingy

I think the impact of the rises so far has not been felt yet simply because loads of people are still on fixed rate mortgages, many of which have some months yet to run. You'd hope that people were looking ahead to the step change in their mortgage costs and tightening their belts accordingly but you just know that most will be ignoring it until it happens. The recent 0.5% rise was a shock and I think it was meant to be so I expect this one to be a more gentle 0.25%. But I don't think we're done yet.

Exodi

thegentleway said:

Exodi said:

Nebulous2 said:

I'm still doing my own observations of hospitality and tourist spots, and can't see many signs of people holding back. A touring circus near us had to put on an extra show recently, as they were so busy. Recent meals out - restaurants have been very busy, but not generally full, which they were a few weeks ago. 

This is the same as in my experience, but I'd imagine it's because increasing interest rates as a means to counter-inflation disproportionately effects those with the largest debt - e.g. mortgages. As most houses are owned outright and less than a third are owned with mortgages, less than a third of households will be truly absorbing the blow of interest rate hikes. Martin Lewis directly asked Jeremy Hunt whether it was his intention to make mortgage holders bear the brunt of inflation (though as you can expect he skillfully dodged the question and began talking about the energy price guarantee).

Isn't that fair though seeing as inflation benefits those with largest debt since the value of the debt is shrinking? And the savers are paying for inflation as the value of their savings is being decimated. It's only really an issue if mortgage holders can't service their debt, hence the importance of stress testing affordability.

While it sounds nice in theory, you have inflation currently running at 7.95% whereas someone with a £200k mortgage at 2% with 15 years left on it (not my plan to cherry pick numbers, use whatever numbers you feel are appropriate) will currently be paying £1287 a month, but if remortgaging at 6% could expect to see their payment increase to £1688 a month (+£400). I don't think it provides any relief to someone who has seen their mortgage payment increase by over 30% to hear 'hey, I know your mortgage has gone up by 30% but just think, inflation has technically devalued the amount you owe by 7.95% so really you're benefiting from inflation. It's the poor savers who are getting decimated.'

Savers by comparison are having their savings devalued by 7.95% but can partly mitigate this through either easy access savings (~4.5%) or fixed products (~6.0%) or invested (which would be expected to outpace inflation over a long enough horizon) - the devaluation of savings will be relatively small if mitigated through competitive savings options.

There aren't really any mitigation options to mortgage holders except finding a large pot of money at the end of the rainbow to pay off their mortgage before their fix expires, jumping in a time machine to buy houses when they were cheaper, or selling.

london21

Because inflation lower than expected will increase by 0.25% and not 0.5%