Following today’s meeting by the Monetary Policy Committee (MPC), the base rate has been increased by 0.5% to 5.0%. This is the 13th consecutive increase and the rate now stands at its highest level in 15 years. This is unwelcome news when so many people are already struggling with the high cost of living. So why was the decision made by the MPC to raise the rate again?
Additional pressure on the inflation rate
The high level of inflation is still sticking. Whilst inflation lowered to 8.7% in April, the rate was still higher than had been forecast. This meant that another interest rate rise was, unfortunately, inevitable. Increasing the interest rate is a way to combat inflation as it means that borrowing becomes more expensive. This, in turn, encourages people to save more instead, especially as a higher rate of interest should be earned in savings accounts.
An unexpected increase in employment and wages
What has exacerbated the issue, however, is that official figures were released on 13th June highlighting an unexpected UK wage growth. Annual pay for UK employees has risen to 6.5% when a rise of 6.1% had been predicted. The rate at which wages have increased is too high for the purpose of trying to reduce inflation. This is because higher wages mean consumers will start spending more, even though in real terms the wages earned aren’t adequate compared with the level of inflation. In fact, when adjusted for inflation, wages are still declining.
As well as UK wage growth, employment on the whole in the UK has increased. This is by an approximate figure of 250,000 in the few months leading to April. This is despite a prediction of 162,000 in a Reuters poll. The rate of unemployment was predicted to increase to 4% but has decreased to 3.8% instead during that period.
Andrew Bailey, Governor of the Bank of England, has said that these new figures show the current labour market to be ‘very tight’. Interest rate increases are the key solution for reducing inflation. Therefore, it looks as if those higher rates will continue for longer than expected. Predictions now state that the interest rate is expected to reach as high as 5.75% or 6% by the end of the year.
The effects on mortgages and the housing market
The expected base rate increase this month had already caused concerned borrowers to secure mortgage deals in a hurry before interest rates go up again. This sudden rush on mortgages actually led a well-known lender to withdraw all of its mortgage products in response to such a high demand. The available home loan products in the UK are already at a reduced number since the beginning of June. Some lenders are, however, said to be relaunching their products with higher interest rates.
Prospective homeowners
For many new borrowers, higher rates will simply put the affordability of mortgages out of their reach. Instead of buying now, they’ll have no option but to wait until rates start coming down unless they either relocate to cheaper areas or consider cheaper properties. This will slow the housing market and have a knock-on effect on construction companies and other businesses related to the property sector.
Existing homeowners
Many homeowners are already struggling to meet their monthly mortgage repayments as interest rates continue to increase. As their fixed rates have come to an end, they’ve chosen to remortgage to avoid paying the standard variable rates offered by their lenders. But the new fixed rates available have, on the whole, been considerably higher than their original ones. The jump in interest rates has had a significant impact on their mortgage repayment amounts. Homeowners with variable-rate deals have experienced increase after increase with each base rate hike.
Speak with an expert broker about your mortgage options
Whilst some lenders are planning to relaunch their mortgage products with higher interest rates, other lenders have begun reducing their rates to be more competitive. At Trinity Finance, we have access to an unrestricted range of first and second charge lenders. Some of these lenders also offer broker-only mortgage products. This means you can rest assured that you’ll be offered the best mortgage deal to suit your needs.
Just get in touch with us on 01322 907 000 to speak with one of our mortgage specialists. They’ll compare your current deal with the alternatives available. You’ll be able to compare the rates and terms to decide which one is the best fit for you. This will give you peace of mind in the current climate.