The Bank of England has increased interest rates four times in the past six months. Rates rose from 0.1% in December 2021 to 1% just six months later, and investors fully expect rates to continue increasing, and they could reach 2.5% within a year.
The interest rate increases come in the face of soaring inflation, and some fear that they could be heading in the direction of the 1990s. However, a senior Bank of England official has said that although interest rates are unlikely to hit record lows again, he does not expect them to go back to the level they were at several decades ago.
Sir Jon Cunliffe, Deputy Governor for Financial Stability at the Bank of England, said, “Interest rates may well have to rise further. But there are also some features about interest rates which are different now to where they were 15, 20 years ago and it’s about balance of savings versus investment in economy. So, while I expect interest rates – having risen back to above pre-pandemic levels – not to see levels we saw again over the last 12 months, I also don’t think we’re heading back to the interest rates of the 1990s.”
The beginning of a downturn
Given the interest rate increases and soaring inflation, the housing market should, by rights, be at the beginning of a downturn. However, recently released data showed that although house price growth did ease slightly in May, it was still high at 11.2%.
According to Mr Cunliffe, one crucial factor that needs to be considered is that although property prices have soared and continue to rise, there has been no significant change to the amount of money buyers are borrowing relative to their income. This, he stated, meant that the housing market boom was not fuelled by debt.
He also pointed out that several factors had contributed to the rise in property prices, some of which were unprecedented, such as the Covid-19 pandemic. During the pandemic, many people made significant decisions regarding their housing situations and where they wanted to live.
In addition, many people saved far more money than they usually would because they could not go out and spend, which has enabled many to get their foot on the first rung of the property ladder.
Full impact still due to take effect
Mr Cunliffe went on to say that it can take 18 months for the effects of the increased interest rates to be seen. However, he added that there were already signs of a slowdown and that there were various factors that would have a dampening impact on house price growth.
This includes record low consumer confidence levels, continued economic slowdown, a drop in business confidence, expected increases in unemployment levels, and the continued rise in the cost of living.