Bank of England: Rate Hikes and Inflation Impact on Household Squeeze

Bank of England

Financial markets expect Bank Rate to peak at 6.25% by the end of this year or early next. For context that would be the highest since 2001, but far from pushing back against these lofty expectations, the Bank of England opted to double down with a surprise 50bp rate hike last month. That was a strong statement of intent, and we now expect at least two more 25bp moves this year and don’t rule out more. It's clear that the committee has lost confidence and patience in its models, and policy will be heavily determined by actual inflation outcomes over the summer.

We're hopeful that some better news on inflation means Bank Rate doesn't need to go quite as high as investors think. But even if we're right, the current level of mortgage rates will exert the most significant squeeze on households for decades, with the exception of a short period in the early 1990s. The greater prevalence of fixed-rate mortgages means the impact is gradual, but the higher loan-to-income multiples on home lending seen over recent years mean that as households refinance over coming quarters there will be a material impact on growth. That suggests rates can't go much above 5% on a sustained basis, and we still expect rate cuts to arrive by mid-2024.