Higher interest rates are the new normal, says HAMISH MCRAE

OK GOOD. What’s happening now? Last week the Bank of England shocked the money markets and many home buyers by raising interest rates by half a %, replacing 1/4.

Instead of doing the bare minimum that markets expected, it did a little extra. Finally, a majority of the Monetary Policy Committee has concluded that it has not been able to raise rates quickly enough, although two outside members – each a professor at the London School of Economics – have voted against making any changes. There is a gap between some instructors and the real world.

The stakes tend to get even higher. The yield of yearling gilts is around 5.25%, but the yield of two-year-old gilts is just over 5%. This raises the cost of borrowing for everyone. If the federal government has to pay more than 5% to borrow for 2 years, it pays the mortgagee about 6%. Even the most creditworthy home buyer has to pay a little more than Her Majesty’s Government.

What happens next?: Rates may go higher, but the first low is expected in the first half of the next 12 months

The problem now could be to prevent the impact of higher interest rates on the financial system. In fact, he doesn’t act too dangerous considering every part thrown at him. Retail gross sales barely edged up in May, and futures wanted purchasing managers to index factors to continue slow progress.

However, some people will have built up a cushion of cash during the pandemic once they can’t spend their earnings, and money is finally starting to generate some curiosity. But many households would have to make cuts, and mortgage lenders could be under a lot of pressure to prevent people from being evicted.

Let’s not forget that most people who bought two or more years ago may have income from their home, albeit only a paper home, until they advertise. Over the life of a 25-year mortgage, you will likely end up with a valuable asset.

In the housing market, it is very important to maintain a low level of confidence, because what is happening is the main determinant of customer confidence. Private consumption accounts for around 65% of gross domestic product, and we want customers to let us know when charges may start to drop.

May 2022 October 2022 May 2023 May 22, 2023 June 5, 2023
Average pledged mortgage for 2 years 3.03% 5.43% 5.26% 5.34% 5.72%
Average fixed mortgage for 5 years 3.17% 5.23% 4.97% 5.01% 5.41%
Fixed/variable, complete items (all LTV) 5087 2258 5264 5385 4995
Data from Money is given on the primary day of the month until otherwise indicated

I think we are about half way through the decline from last September’s peak and the market will start to improve in the early part of the next 12 months. But so much depends on the first charge reduction time. Once people can see mortgage rates rising, confidence can start to return. The underlying demand for housing remains excessive.

And that down payment is kept to a minimum? Ultimately, it depends on the rate at which inflation declines. The last week of these numbers had sunshine. Everyone was understandably focused on the truth that inflation is perceived on the customer stage. But on the wholesale scene, it sizzles.

The producer value index – how much companies pay for what they advertise – rose nearly 20% last July. It was scary and it speaks volumes for our distribution system that at the customer level the inflation was not more than half. The index is now down to just 2.9% year-on-year, a destructive six-month period. It will be a few more months before the reduction in producer costs is reflected in the costs we pay to retailers.

I am also involved in price increases in the service provider sector as the lack of staff makes life very difficult. But we are previously high and the uncertainty is about how soon inflation will come down and where it will stabilize, not whether it will come down or not.

If this is appropriate, we expect a reduction in the primary charge in the first half of the next 12 months – most likely in February, when the Bank updates its forecasts as part of the quarterly Monetary Policy Report. However, this does not mean that the ultra-low fees of the previous decade will return, not really because of technology. Maybe not at all.

Never? That’s quite a long time, but keep that in mind. Until the beginning of 2011, the yield of 10-year-old gilts has not fallen below 2% at any point in the past 300 years. But it stayed below that for much of the following decade, reaching a low of 0.074% in August 2020. This caused the cost of borrowing to drop for everyone. It is now back to 4.3%.

So what debtors experienced in this decade was quite unprecedented. Rates will come down just a little bit, but not to the extent that many homebuyers regularly consider.

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