The Bank of England has raised the base rate to 1%, the fourth increase since the start of December.
The Bank is looking to get the inflation rate under control, which currently stands at 7% thanks to rising energy prices. However the Bank still expects the CPI inflation rate to rise to 10.25% towards the end of the year, up from its previous forecast of 5.75%.
The rate rise could have been steeper than the 0.25% increase we’ve seen, as three members of the Bank’s Monetary Policy Committee wanted to go for a 0.50% rise to 1.25%.
It seems this pattern of rate rises will continue, as the Bank said that “most members of the committee judged that some degree of further tightening in monetary policy might still be appropriate in the coming months”.
Tom Bill, head of UK residential research at Knight Frank, said: “The base rate increase will not by itself have an impact on house prices but will contribute to a slowdown that appears to be underway.
“Growth will calm down as the cost-of-living squeeze gradually takes it toll on demand and mortgage lenders continue to pull their best products from the market.
“The other key consideration is supply, which has had the single biggest impact on house prices this year.
“As it rises, the double-digit house price growth that has taken most people by surprise during the pandemic will return to earth. We forecast UK prices will grow by 5% this year.”
The UK’s economic prospects have taken a hit, as the Bank slashed its forecast for gross domestic product growth next year from 1.25% to -0.25%.
Unemployment is expected to rise to 5.5% by the middle of 2025, while energy prices should rise for most of 2023.
Brian Murphy, head of lending at Mortgage Advice Bureau, said: “The Bank of England is on a hiking path, something many homeowners have not had to face for 13 years. Coupled with soaring cost of living, raised energy bills, and low consumer confidence, for many new buyers the prospect of housing affordability is sprinting away from them.”
Mortgage costs should continue rising, as the Bank looks to continue hiking the base rate.
Paul Johnson, head of mortgages at St. James’s Place, said: “As interest rates continue to increase, anyone buying a property will see a direct impact on the amount they can borrow.
“However, a far greater impact is likely to be seen from the increase in the cost of living, as this is stopping mortgage companies lending as much as they were previously.
“Lenders are having to build in the increased costs of food and fuel into their affordability calculations. Buyers need to ensure not just that they can afford monthly mortgage payments and the associated bills, but that it is genuinely the best time for them to buy and not speculate on the property market.
“Interest rates look set to continue to rise, so fixed rates with payment security will prevent those with mortgages suffering the impact of further fluctuations.
“The property market still hasn’t seen a major slowdown, with demand still outstripping supply, but if interest rates and mortgage companies’ affordability requirements continue to increase we will ultimately see a fall in property prices.”
The next base rate decision will be made on June 16th.