MPC vote on base rate

The Monetary Policy Committee made their latest announcement on the Bank of England base rate, on 16th December. The decision was made to increase the rate, by 0.15 percentage points, to 0.25%.

Whilst there was some last minute speculation it may have held at 0.1%, with inflation at 5.1% - well above the government target of 2% - it won’t come as a surprise that an 8-1 majority vote was submitted by the committee, for an increase.

The MPC were strongly anticipated to increase the base rate, as a way of dampening inflation. However, with the shadow of Omicron growing – France announced on the same day that it is closing it borders to the UK, with the exception of its own nationals, due to the surge in the Covid variant numbers – it was questioned by some whether the MPC may hold off, to give the country the financial stimulus to buoy-up the economy.

Omicron certainly held a strong focus within the report from the MPC, which referenced its higher rate of transmission compared with the Delta variant. It was acknowledged that there had been an immediate downward turn in the prices of risky global assets, but that this had since broadly recovered.

The latest Omicron variant of Covid is expected to have an impact on activity early in the New Year, but reflecting on what happened in March 2020 when other waves of the virus were rife, the committee observed that GDP had previously remained largely unaffected. So, whilst there are no guarantees of what impact Omicon will have, they are using prior experience to influence current decision making.

Why has the base rate been increased?

There are a couple of key variables which strongly influence base rate changes. One of those is employment.

UK employment statistics show significant signs of strength, despite the gruelling impact of Covid on many businesses. The unemployment rate fell 4.2% over the three months to October 2021 and figures for those in paid employment rose strongly in November.

It had been feared that levels of employment would be hit hard in September, at the close of the Coronavirus Job Rentention Scheme. But, there are no signs of this in existing data and earnings growth is estimated to be better than records prior to the pandemic.

Where the MPC may at times have to use a tempering of the base rate, to support employment, this has not been necessary given the above.

A second key variable, in a decision to change the base rate, is the state of the UK’s economic growth.

Global consumer price inflation figures have been healthier than might have been expected, and there have been greater than expected rises, in advanced economies.

The UK’s level of Gross Domestic Product (GDP, the measure of value added from production of goods and services) has been revised downwards by the BoE, by half a percent. This puts it at 1.5% below its position, prior to the Coronavirus pandemic.

Consumer Price Inflation (CPI, the average price of consumer goods) experienced significant growth between September and November from 3.1% rising to 5.1%. This is anticipated to hold around 5%, with a potential peak in April next year of approximately 6%. At 5.1% it is the highest CPI has been since September 2011.

The Governor of the BoE, Andrew Bailey, under these circumstances, is required to write a letter of explanation to the Treasury, to explain why inflation has moved away from the 2% target. In the letter, Mr Bailey refers to changes in supply and demand and disruption to supply chains having resulted in “bottlenecks, which have exerted upward pressure on inflation globally.” The motor industry, household goods and clothing prices were mentioned as influential.

The predicted April peak has been attributed to the increase in gas and electric prices.

Property prices

Earlier in the month the latest figures from the Halifax House Price Index were released, and showed a +1.0% change month on month in Novembers figures, compared with October. This is the fifth consecutive rise and strongly influential on the decision to increase the base rate.

The average UK property price was recorded at £272,992 and Wales broke an all time record by exceeding an average value of £200,000.

Managing director of Halifax, Russell Galley explained the factors driving house prices:

“The performance of the market continues to be underpinned by a shortage of available properties, a strong labour market and keen competition amongst mortgage providers keeping rates close to historic lows.”

What does the base rate rise mean for landlords?

At 0.1%, the base rate sat at an exceptionally low position, which could not have been sustained forever. But, it is particularly important at this economically fragile time that changes to the base rate are gradual and measured, hence a modest rise to 0.25%.

Mortgage rates are strongly influenced by the base rate, so increases – as have been widely discussed recently – could well be on the cards. This is especially true since the cost to banks for borrowing, has been rising for some time.

Fixed rate buy to let mortgages have been favoured by a large proportion of UK landlords. Being on a fixed rate will mitigate against any immediate impact on monthly mortgage payments. But, if investors have purchased at recent low rates, when renewal dates hit, mortgages could be more expensive.

Variable buy to let interest rates may well experience an increase as a result of the rise in the base rate. It may be that any increase is able to be absorbed by the margins in rental income. If not, this may influence decisions over the prices of rent.

If the MPC make further increases to the base rate over 2022/23, which has been discussed as a possibility amongst UK economists, the impact on mortgage interest rates could be accentuated.

Right now, the headline buy to let mortgage rate remains below 1%, so prospective investors may well benefit from bringing forward any application plans, to lock in a favourable, low rate.