Let’s wait and see before further interest rate rises - David Alexander

You wait years for an interest rate rise to come along and then seven happen in a year. However, there isn’t much to laugh about for homeowners who have seen interest rates rise on an almost monthly basis since last December. After more than a decade where nothing happened with interest rates and many homeowners had lived under the assumption that rates never change, suddenly we are seeing relatively steep increases over a short period with more to come. This does make you question why a conservative and cautious organisation like the Bank of England has become quite so cavalier.

The old system was to increase interest rates and wait and see what happened. If the market responds, and inflation is held then you don’t need to intervene again. If not, then another cautious increase four to six months after the first, and another period of waiting to see the response.

Now it appears that the Bank is intent on increasing rates much more frequently without waiting for the impact on the markets and the economy. The result is quite a panicky, nervous atmosphere among lenders and borrowers resulting in a housing market that was going great guns for a couple of years but has now had the brakes unceremoniously and quite severely applied bringing everything to a juddering halt.

The question is, are they making up for earlier intransigence and should they have acted sooner to prevent inflation rising so rapidly. After all they knew that house prices were rising at an enormous rate and that there were other inflationary pressures in the pipeline. The war in Ukraine and its impact on oil and gas is clearly a major factor but there were other signs that inflation was going to be an issue which should have rung alarm bells at the Bank of England. Many people on furlough were better off than normal because they had no outlet for their income. This produced substantial pent-up demand which has resulted in a spending spree contributing to rising inflation.

David Alexander

Added to this is the prolonged period of historically low interest rates has led to a substantial rise in the amount people borrow. Borrowing now seems to be based on the affordability of monthly payments rather than any concerns over the overall amount of debt. In fact, I would doubt that most people even view their mortgage as a debt. It is simply a vehicle to allow them to be able to afford to buy the house they want in the area they like.

Earlier interventions by the Bank would have slowed the rate of inflation and prepared people for further rate rises in the future. An earlier rise would have sent a signal that there was only ever one way which rates were going to go, and people need to prepare, and be able to afford, increases of two, three or four per cent higher base rates.

But nobody wanted any brakes on the economy as we came out of the pandemic so it would potentially have been an unpopular action at a time when it was important for the country to feel good.

The concern is that it is uncertainty that kills a property market more than rate increases. If people don’t know how much they will be paying in six months’ time they will panic and assume the worst which is where we are at the moment. We need a period of calm, a steadying of the nerves, and fewer statements hinting at rocketing interest rates if we are to placate the marketplace and prevent house prices taking a dip. I would advise the Bank of England to hold off on any more interest rate rises until the deflationary impact of the utilities support has fed through. Only then will they be able to assess whether they need to increase the rates further to counter inflation.

David Alexander is CEO of DJ Alexander Ltd