Grim recession warning and mortgage misery after Bank of England interest rate rise

Grim recession warning and mortgage misery after Bank of England interest rate rise

The Bank of England has piled mortgage misery on thousands of homeowners and first time buyers with the biggest rise in interest rates in more than 30 years.

The Bank took the action as it warned Britain is heading for its longest recession in modern history with no recovery until summer 2024.The recession is not predicted to be as deep as the downturn that followed the financial crisis of 2008.

The Bank’s Monetary Policy Committee (MPC) ordered a 0.75 per cent increase in its benchmark borrowing rate from 2.25 per cent to 3 per cent, the highest level since October 2008 on Thursday.

It said the hike was needed to keep the lid on soaring inflation, which hit a joint 40 year high of 10.1 per cent in September.

The Bank of England’s main interest rate has not gone up this fast since November 1989 when it rose from 13.75 per cent to 14.875 per cent. An even bigger hike was briefly imposed on Black Wednesday in September 1992 but was revoked by then Chancellor Norman Lamont before the end of the day.

Governor Andrew Bailey said that if the Bank did not “act forcefully now the consequences will be worse later,” although he acknowledged the rate hike would “have a real impact on people’s lives” adding: “It is a tough road ahead.”

The move will immediately add around £115 to the monthly bills of a homeowner with a typical £300,000 tracker home loan with rates that move in line with the Bank of England and with 20 years left outstanding to pay.

The Standard revealed earlier this week that monthly bills have now risen £420 from £1,359 to £1,779 over the past year for owners with a mortgage of this size.

For borrowers who have taken on even larger levels of debt the increase will be even more crippling. For a homeowner with a £500,000 loan - not unusual in London - Thursday’s increase will add £191 a month to monthly bills, lifting them to £2,964.

Home owners on fixed deals will be shielded for now but have to remortgage at far higher rates when their fixed terms come to an end.

Governor of the Bank of England Andrew Bailey during a press conference for the release of the Monetary Policy Report (AP)
Governor of the Bank of England Andrew Bailey during a press conference for the release of the Monetary Policy Report (AP)

On Thursday, two year fixes averaged 6.46 per cent while five year deals were at 6.3 per cent, according to latest figures from Moneyfacts.

In its report accompanying the rate decision the MPC said the UK economy faces “a very challenging outlook” as it battles recession.

GDP is forecast to fall 0.75 per cent in the second half of 2022 and continue in recession through 2023 and the first half of 2024 before an upturn begins.

Following the grim forecast Mr Bailey warned the UK was just hours from potential total financial meltdown in the wake of then Prime Minister Liz Truss’s disastrous mini-budget.

He said the Bank was forced to step in “quickly” and “decisively” to mitigate a “very real threat to financial stability” after markets were spooked by the calamitous £45 billion tax giveaway.

“We certainly reached a point where markets were very unstable, and these were core markets, this is the Government bond market, which is in many ways the most core of all,” he told Channel 4 News.

Asked if the UK was days, even hours, away from potential total meltdown, Mr Bailey said: “I think at that point when we intervened, I can tell you that the messages we were getting from the markets were that it was hours.”

He said it was “hard to compare” the autumn’s turmoil with the global financial crisis in 2008, adding: “I’m not sure I could give you an exact comparison, but this felt and was a very real threat to financial stability.”

Chancellor Jeremy Hunt said “the most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible” but he admitted “there are no easy options”.

Shadow Chancellor Rachel Reeves said: “Families now face higher mortgages and more anxiety after months of economic chaos.

“Today’s recession warning lays bare how 12 years of Tory government has weakened the foundations of our economy, and left us exposed to shocks, lurching from crisis to crisis with falling living standards and low growth.

“As Chancellor and now Prime Minister, Sunak must face up to his mistakes that have led to the vicious cycle of stagnation this Tory government has trapped us in.

“Working people are paying the price for Tory failure. Britain deserves more than this.

“Labour will provide the economic responsibility we need, and bring forward a proper plan for growth across our country, investing in jobs in renewables, nuclear power and in insulating homes; fixing business rates; and driving forward a modern Industrial Strategy.”

Paula Higgins, CEO of campaign group HomeOwners Alliance, said: “Few homeowners will avoid the shockwaves caused by rocketing rates. The shocking mortgage rate trend spells gloomy winter for homeowners with eye watering mortgage costs for those coming to an end of two and five fixed rate deals alongside spiralling living costs. These higher rates are also bad news for the 2 million people on variable rate mortgages who will see their mortgage payments instantly soar.”

The hike came as London homeowners were on Thursday given a bleak warning that property prices will fall faster in the capital than anywhere else in the country next year as higher mortgage rates sends the property market plunging.

Prices outside the most exclusive addresses of central London will slump by 12.5 per cent next year with a further 1 per cent dip in 2024, before a recovery begins in 2025, according to new forecasts from agents Savills today.

However, even by 2027 prices will not have fully recovered the lost ground and will still be 1.7 per cent below current levels.

The Bank’s 0.75 per cent hike came the day after the US Federal Reserve increased its key interest rate by the same amount.