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Bank of England warns UK housing market has weakened as it lifts UK interest rates again

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Bank: UK housing market indicators have weakened

Most indicators tracking the UK housing market have continued to weaken in recent months, the Bank of England points out.

The minutes explaining today’s interest rate decision point to the latest data from lenders showing that house prices have fallen this autumn, after rising sharply during the pandemic.

They say:

Although the official UK House Price Index had increased strongly in October, house prices had fallen quite sharply in the Nationwide and Halifax indices in October and November.

The November RICS survey had shown further declines in price balances and continuing weakness in indicators of housing market activity.

According to higher-frequency Zoopla data, the volume of offers made on properties by potential buyers had declined to below their normal seasonal levels.

Over in Frankfurt, the European Central Bank has followed the Bank of England – and the US Federal Reserve – by lifting its interest rates by half a percent.


It says:



The Governing Council today decided to raise the three key ECB interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them further.


In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.



That takes the interest rate on the ECB’s main refinancing operations to 2.5%.


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Economists agree that UK interest rates will probably rise further in the months to come, but disagree about where they will peak.


Thomas Pugh, economist at audit, tax and consulting firm RSM UK predicts that rates will hit 4.5% in 2023.



The smaller 50bps hike, which takes interest rates to 3.5%, the highest level in 14 years, suggests the end is in sight for the BoE’s tightening cycle.


However, the minutes of the meeting made it clear that although the end is in sight, there are still more hikes to come. We expect rates to rise to 4.5% early next year and that they won’t start to be cut again until early 2024.



Paul Dales of Capital Economics also predicts the Bank will lift rates to 4.50% early next year before cutting them back to 3.00% in 2024.



There were three ways in which this felt a bit like another “dovish hike” from the Bank. First, in November seven MPC members supported the 75bps hike. Today only six members voted for the 50bps hike. Catherine Mann did vote 75bps. But Swati Dhingra and Silvana Tenreyro both voted for no change. They said “the current setting of Bank Rate was more than sufficient”.


Second, the passage in the statement in November on risks to inflation being skewed to the “upside” was dropped.


Third, the Bank dropped the section that pushed back strongly against market pricing that rates would rise to a peak of 5.25%, but that may just be because market rate expectations have since fallen back to 4.50%.



But analysts at ING predict rates will peak lower, at 4%.


In a note to clients, ING’s developed markets economist James Smith says:



For now, our best guess is the Committee implements another 50bp hike in February before calling it a day. The hawks can continue to point to 6% wage growth and the fact that core services inflation is running higher than expected in November.


But today’s meeting is a further demonstration of the delicate balancing act facing the BoE, between mitigating the risks of a tight jobs market on the one hand against mounting concerns about the housing market and the health of corporate borrowers on the other.


We expect Bank Rate to peak at 4% in the new year, although we aren’t yet convinced a rate cut will be as quick to follow as in the US (where we expect cuts shortly after the summer).



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The Institute of Directors has warned the Bank of England not to tighten monetary policy too tightly, as it tries to pull down inflation.


Kitty Ussher, IoD chief economist, says:



“From a business point of view, if higher interest rates are required now to stabilise prices in future, then the resulting ‘necessary recession’ should be as short and shallow as possible.


“With the labour market starting to turn, the economy already contracting and base effects from last year’s price rises expected to bring next year’s headline inflation rate down automatically, it is important that the Bank does not tighten too far and risk prolonging the pain. Not only would that be bad news for households and businesses, but it would also risk the Bank undershooting its own inflation target in the future.


“On balance, while today’s rise may be justified, given the long lead time between interest rate rises and the impact on demand, we may soon be getting to the point where enough has been done.”



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An entire generation of borrowers weaned on ultra-cheap rates is facing a serious reality check, warns our economics editor Larry Elliott.



The speed at which rates have risen and the dawning realisation among borrowers that there will be no return to the emergency levels reached during the Covid-19 pandemic is bound to have an impact on an already weak economy. Interest rates were at rockbottom levels for well over a decade following the financial crisis of 2007-08 and an entire generation has grown up believing that ultra-cheap borrowing is the norm. What’s more, many people have bought houses at high loan-to-income ratios in the belief that mortgage rates will be permanently…

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