Understanding Bank of England Interest Rates: What Lies Ahead for Borrowers
In the intricate world of finance, few factors hold as much sway over the economic landscape as central bank interest rates. For homeowners and potential buyers, these rates significantly impact the cost of mortgages and, consequently, the health of the property market. In this blog post, we'll delve into the workings of the Bank of England interest rates, their historical context, and speculate on what the future might hold for borrowers.
Bank of England Interest Rates
The Bank of England sets the base interest rate, often referred to as the Base Rate. This rate influences borrowing costs across the economy. When the Base Rate is low, borrowing is cheaper, encouraging spending and investment. Conversely, when the rate is high, borrowing becomes more expensive, curbing inflation but potentially slowing economic growth.
Historical Context
Looking back over the last decade, we see a significant trend of low-interest rates. Following the 2008 financial crisis, central banks worldwide, including the Bank of England, adopted a policy of low-interest rates to stimulate economic recovery. For many years, borrowers benefited from historically low mortgage rates, fostering a booming housing market.
The Impact of COVID-19
The COVID-19 pandemic sent shockwaves through the global economy. Central banks responded with unprecedented measures, slashing interest rates to historic lows to cushion the economic fallout. For mortgage borrowers, this meant even lower rates, making property ownership more accessible for many. In fact here in the UK we experienced the lowest rate on record when it was down at 0.1% leading to mortgage deals of sub 1% for a period of time. This certainly led to a short period of house price growth after the first national lockdown in 2020, on top of this there was a stamp duty holiday enabling certain transactions to go through without the extra burden of paying stamp duty.
Future Speculation: What Might Happen?
Since early 2022 the Bank of England have raised interest rates on each of their meetings except the last. The base rate now sits at 5.25% and the reasons for the rise over the past year or so has been blamed on inflation. Many people feel (me included) that the inflation was actually partially caused by the Bank of England in the first place by the vast amount of quantative easing they did during the pandemic years. On top of this we have a war in Europe for the first time in 80 years and this has put a strain on the supply of goods and raw materials from that part of the world therefore pushing up prices. None of the above could be prevented by increasing interest rates, nevertheless rates went up.
With inflation topping 10% in early 2023 the Bank of England continued to raise rates in the hope that this would bring down inflation. To a degree the policy appears to be working as inflation has now come down to below 7%, their target is 2%.
In previous blogs I have said to watch wage inflation and I stand by that. Wage inflation is around 7% currently and I think this may put pressure on actual inflation meaning rates might not have stopped going up. However to counter this the economy is not in great shape, although again better than expected, and this slow growth could lead to lowering of rates to stimulate the economy.
My best guess is that there will be another rate rise possibly this year then a long period of leaving it alone. Following this towards the end of 2024 I can see the Base rate falling a little to offer some stimulus to the economy. Longer term I don’t think we will ever see the base rate down near 1% as we have done for so long through the 2010s. Expect fluctuations above a low of 3% and a high of 6%.
How Borrowers Can Prepare
Regardless of the future trajectory of interest rates, borrowers can take several steps to prepare for potential changes:
Financial Planning: Review your budget and ensure you can comfortably handle higher mortgage payments if rates rise.
Stay Informed: Keep an eye on economic indicators and central bank announcements. Being aware of the broader economic context can help you make informed decisions about your mortgage.
Consult a Mortgage Adviser: Mortgage brokers, like The Surrey Mortgage Broker, can provide personalized advice tailored to your financial situation. They can guide you on the best mortgage options, considering your long-term financial goals.
In conclusion, while the future path of Bank of England interest rates remains uncertain, borrowers can navigate these changes with preparation and professional guidance. By staying informed and making prudent financial decisions, homeowners and potential buyers can confidently face whatever challenges or opportunities lie ahead in the evolving landscape of mortgage rates.
