I, like many of you, likely felt a sense of relief when the Bank of England decided to keep interest rates steady at 5.25%. There had been widespread speculation that the Bank might authorise one final rate increase, with the announcement that it would be the last. It almost seemed as if the Bank was saying, “You’ve endured 14 rate hikes; what harm could one more do?”
In the end, though, they made the sensible choice to leave rates unchanged. The collective relief was palpable, even if it was akin to emptying seven bins. We were spared an interest rate hike that, in my opinion, should never have been on the table.
While it might be tempting to get overly excited about the lack of change, it undeniably represents good news for the property sector, given the alternative could have been quite bleak. Mortgage holders were facing tremendous pressure, and, in my view, unfairly so.
Landlords bore the brunt of the burden, enduring substantial rate hikes that couldn’t be offset against rental income, rendering many buy-to-let properties financially unviable. Over recent months, landlords have been evicting tenants and selling their properties in large numbers. Few are purchasing with the intention of letting them. Those who have retained properties have often raised rents substantially to cope with the new, eye-watering mortgage payments.
Supply in the rental market is dwindling as many landlords have exited, with some unlikely to return. While the average homebuyer may view this as a positive development—more properties for sale and fewer “greedy landlords” driving up prices—the reality within the industry is far more complex.
If this was an intentional market rebalancing by the Bank and the Government, it appears to have been executed in an unusual manner. Punishing all mortgage holders to promote homeownership doesn’t seem to be the right approach, in my opinion. In fact, this could be the very reason we find ourselves in the current situation.
The stark reality is that interest rates have been kept too low for too long. The Bank, albeit belatedly, has recognised this error and has been playing catch-up ever since. Tasked with reducing inflation to 2%, their primary tool has been interest rate hikes, regardless of the potential consequences.
Yet, despite 14 rate increases, inflation hasn’t been significantly curtailed. This is because the inflation we’re witnessing isn’t solely driven by consumer spending. Instead, it’s a result of soaring energy costs and, ironically, the very interest rate hikes meant to combat it.
Businesses have not only had to pass on the added expenses of increased fuel costs but also the higher cost of borrowing. Employees have been compelled to negotiate higher wages to cover rising rent or mortgages, stemming from the rate hikes meant to counter inflation.
It’s a cycle that some might describe as nonsensical, if not outright madness. Fortunately, the Bank of England seems to have finally grasped this reality as well. We can collectively breathe a sigh of relief, at least for now.