Experts dub 3% interest rate “Operation Protect the Housing Market”

The Bank of England (BoE) announced on November 3rd that it is further raising the base interest rate from 2.25% to 3%. This means more bad news for mortgage borrowers. Financial experts have described the BoE’s decision to increase rates as “operation protect the housing market”.

With potential homebuyers delaying taking out a mortgage at the current record-high rates and lenders pulling many of their mortgage products off the market, the housing market does not appear to be recovering anytime soon. BoE reports that more buy-to-let homeowners are selling their properties, while house prices are slowing down due to the sharp decrease in demand.

Finance experts at CMC Markets predict that the base rate could reach 4% and see no decrease much before the end of 2024. Variable mortgage rates will likely continue to rise accordingly throughout 2023. The lower demand in the housing market and the likely increase in supply in the near- to medium-term may benefit financially stable buyers who may be able to lock in a lower house price in the next two years.

Michael Hewson, Chief Market Analyst at CMC Markets, comments: “The pound had been trading in the middle of the pack against the US dollar, until the Bank of England announced it was raising rates by 75bps, although there was dissent on the size of the move, and then spent the next hour undermining that hawkish move in what can only be described as “operation protect the housing market”.

On the factors determining the fluctuations of the base interest rate, Hewson explains: “Recent sterling weakness certainly hasn’t helped when it comes to the inflation narrative for the Bank of England, along with the recent political turmoil, which has served to push up import costs, but has also increased borrowing costs, in turn prompting a rise in mortgage rates. If the bank hadn’t kept rates low for so long and even flirted with the idea of negative rates as recently as two years ago, they wouldn’t be in the unholy mess they are in now.”

While the BoE suggests that it would likely continue to raise the bank rate to achieve a “sustainable return of inflation to target” (i.e. 2%), it admitted that “considerable uncertainties” persist, driving inflationary pressures, in which case the Bank “will respond forcefully, as necessary”.

The BoE forecasts inflation to start falling around mid-2023, reaching 5.2% by the end of next year from its current peak of almost 11%. The UK economy will remain in recession until 2024 H1, when GDP will start recovering.

The next meeting of the Bank of England’s Monetary Policy Committee will take place on December 15th, 2022.