[Finance] Base rate increase.

[Machiavelli]

As with life it is how much slack people factor into their cost of living. Being warned is one thing, but have a pandemic, cost of living crisis, fuel crisis, coupled with interest rates not slowly working their way back to a norm, but pretty much jumping 4% within a quarter isn't a financial shock many can deal with or necessarily prepare for - historically there hasn't been many jumps of this magnitude in such a short space of time.

This base rate rise which is now 4% over 5 months is a significant shock. This is comparable to the 1988 base rate leap when it went from 8% in June 1988 to 13% by Nov 1988, a 5% base rate rise in 5 months. Hopefully the comparison ends there, because it rose another 2% by Oct 1989.

From that high point of 15% in Oct 1989, interest rates pretty much fell, or at least didn't rise significantly for the next 33 years until this point. People are now up against history in facing the end of a mortgage deal and looking at a 3-4% increase, especially coupled with cost of living etc.

Top post, but a couple of points:
-- first, add in that real-term wages have fallen way behind house price inflation
-- I'm not convinced with your comparison with 88: the 5% jump may be a larger amount, but it was only a c60% jump. The rises over the past c15 months have gone from 0.1 to 4.25%. I'm aware that mortgage rates will be higher than the BoE rate, but that's still a massive jump of over 100% for those not on fixed rate mortgages.

 

[beorhthelm]

I repeat my view that at present, capital is entirely running the show, with every benefit afforded to it, and none of the benefits of innovation being enjoyed by employees who have their wages topped up by taxpayers, because even the basic cost of private labour is being borne by the taxpayer instead of those who benefit from the labour.

i could repeat too, around it goes. i agree though, we should stop subsidising labour so that the employers have to pay more instead.

 

[chickens]

Yes, you're missing the fact that inflation is being driven by workers asking for 'pay rises', particularly that pesky lot in the public sector ...

... or so we've been told.

Ever feel like you’re being lied to?

 

[Barnet Seagull]

Firstly, an apology if any of the below comes across as condescending to my fellow learned NSCers - not my intention ....

Raising interest rates to combat rising [or high] inflation has always been a method of modern Keynesian economics used by all flavours of government over the years.
In May-97 Gordon Brown [with Tony Blair as PM] handed control of base interest rate setting over to the [independent] Bank of England who have been responsible for setting the rate these last 25 years..

By raising interest rates, this takes cash out of the economy, which makes many items [goods & services] less attractive / unaffordable [depending on product's propensity to consume].
When interest rates rise: if you have debt, more of your income is spent on the interest, leaving less available for other things. It intends to also discourage further increasing borrowing.
If you have surplus income [lucky you], then higher savings rates make it more attractive to save than to spend, again taking cash out of the economy.
So the overall effect of an interest rate rise is to cool the economy and when this happens, inflation will come down as less goods and services are consumed.

I agree, it is a terrible situation for many, but having less cash [or disposable income] available, generally curbs spending, forcing folk to cut their cloth accordingly.
I may be naïve, but I trust our welfare state to support those who are in genuine hardship.
For the rest of us: tighten our belts, buckle-up and do our best to ride out the storm.

That's the "theory", but it's an incredibly crude and slow to react mechanism.

The issue here is that inflation isn't driven by the attractiveness of good and services, i.e. demand, it's driven by supply side constraints.
As such, when supply side constraints ease, inflation will come down on it's own and doesn't need intervention

All you're actually doing with this interest rate rise is increasing the cost of borrowing. For businesses, this means putting people out of work, for households this means reducing demand. This then leads to a lack of spending and job losses and basically pushes us further away from growth.

The only beneficiaries here of this are those with no debt and lots of savings, capital rich businesses and banks. They want to keep wages low and rake it in by opportunistic pricing.
Everyone else to put it very simply is being f***ed over.

If this was demand driven, the most effective mechanism to reduce spending is to increase taxes.
Ultimately this is fundamentally flawed economics and is pushing us into recession.

 

[Live by the sea]

Still waiting for fixed rate bonds to go up by 1/4 per cent .

 

[Sarisbury Seagull]

Just to balance the gloom, immediaty after the base rate rise, Nationwide announced they’re reducing their fixed and tracker rates by up to 0.45%. That is on top of 4 other lenders doing the same already this week.

The base rate may have continued to rise but fixed rates have consistently come down since the peak in October/November. They’re now on average 2.5% and in some cases 3% lower than they were then with the majority of lenders - making the monthly repayments a lot more affordable.

Speak to a good mortgage broker.

 

[beorhthelm]

Still waiting for fixed rate bonds to go up by 1/4 per cent .

 

[Weststander]

As with life it is how much slack people factor into their cost of living. Being warned is one thing, but have a pandemic, cost of living crisis, fuel crisis, coupled with interest rates not slowly working their way back to a norm, but pretty much jumping 4% within a quarter isn't a financial shock many can deal with or necessarily prepare for - historically there hasn't been many jumps of this magnitude in such a short space of time.

This base rate rise which is now 4% over 5 months is a significant shock. This is comparable to the 1988 base rate leap when it went from 8% in June 1988 to 13% by Nov 1988, a 5% base rate rise in 5 months. Hopefully the comparison ends there, because it rose another 2% by Oct 1989.

From that high point of 15% in Oct 1989, interest rates pretty much fell, or at least didn't rise significantly for the next 33 years until this point. People are now up against history in facing the end of a mortgage deal and looking at a 3-4% increase, especially coupled with cost of living etc.

Sept 92 is worth a mention too. The inept duo of Major (forget the cuddly Remainer persona today) and Lamont mismanaged base rates to 15%, my mortgage at the time peaked at 15.75%. In a dumbass strategy of shadowing the forerunner of the Euro the ERM, taking on global money markets and losing. 100,000’s of homes were repossessed, then people were bankrupted with banks aggressively chasing the deficits.

 

[raymondo]

Sept 92 is worth a mention too. The inept duo of Major (forget the cuddly Remainer persona today) and Lamont mismanaged base rates to 15%, my mortgage at the time peaked at 15.75%. In a dumbass strategy of shadowing the forerunner of the Euro the ERM, taking on global money markets and losing. 100,000’s of homes were repossessed, then people were bankrupted with banks aggressively chasing the deficits.

Me too. Mine peaked at 16%. Luckily I'd been cautious when assessing what I could afford on a mortgage.

 

[Weststander]

I must be missing something here. Inflation is not being driven by a consumer spending boom, inflation has been caused by increased supply side costs, notably energy costs and the war in Ukraine. Interest rates have no impact on these factors, in fact by increasing the debt to those who hold a mortgage the BoE is actually increasing the effects of inflation, this seems utterly barmy to me.

On the flip side those who make their income from sitting on assets will continue to coin it whilst those of us who actually work for a living will find our incomes squeezed yet again.

Already posted in this thread a couple of months.

The BOE state in interviews that these interest rate hikes are to prevent the vicious circle of secondary inflation.

The first wave caused supply issues, oil prices, gas prices and the war in Ukraine. The secondary wave would be caused by pay hikes, further business price hikes to match, then pay hikes.

So they say.

 

[Weststander]

Me too. Mine peaked at 16%. Luckily I'd been cautious when assessing what I could afford on a mortgage.

My flat ended up with some negative equity, it took a few years to recover then I flogged it. A slow process, finally getting rid in about 1997 I think.

 

[Westdene Seagull]

You don’t make any profit unless you move out!!

And even then the only way to realise a profit is to move somewhere cheaper. Despite what @Uncle C states - most people don't see their home as something to make a 'profit' out of.

 

[Paulie Gualtieri]

Just to balance the gloom, immediaty after the base rate rise, Nationwide announced they’re reducing their fixed and tracker rates by up to 0.45%. That is on top of 4 other lenders doing the same already this week.

The base rate may have continued to rise but fixed rates have consistently come down since the peak in October/November. They’re now on average 2.5% and in some cases 3% lower than they were then with the majority of lenders - making the monthly repayments a lot more affordable.

Speak to a good mortgage broker.

I suspect they had forecast a higher base rate

 

[Sarisbury Seagull]

I suspect they had forecast a higher base rate

That’s exactly it. Back in October there were fears/an expectation that it could reach 7% or 8% this year.

 

[LamieRobertson]

Still waiting for fixed rate bonds to go up by 1/4 per cent .

Just in time for new ISA season hopefully

 

[raymondo]

My flat ended up with some negative equity, it took a few years to recover then I flogged it. A slow process, finally getting rid in about 1997 I think.

The recovery time is a pretty gloomy one. Boom/bust is difficult to deal with... especially if much of the boom part is missed.

 

[Weststander]

…

 

[Weststander]

The recovery time is a pretty gloomy one. Boom/bust is difficult to deal with... especially if much of the boom part is missed.

I got back on the property market with a modest house in 1999.

I worked with a know it all, an incredibly tight fisted bachelor, who bought a crap bungalow but in a very posh part of the city in the mid 90’s …. perfect timing if you love money. All part of his wealth making plan, he was proud of that forever and calculating his wealth. The archetypal ‘knew the price of everything and value of nothing’.

 

[Paulie Gualtieri]

That’s exactly it. Back in October there were fears/an expectation that it could reach 7% or 8% this year.

I’m coming off a very decent fixed in November so watching closely, thankfully childcare costs ceased when the youngest starts school in Sept so absorbed somewhat but still expecting +£350-£500 a month increase

 

[Uncle C]

Find me one home owner that says "my house has gone up in value by xxx thousands of pounds but that makes me sad"

And even then the only way to realise a profit is to move somewhere cheaper. Despite what @Uncle C states - most people don't see their home as something to make a 'profit' out of.