M&G: British people with a mortgage are the biggest victim of unexpected BoE interest rate hikes

M&G: British people with a mortgage are the biggest victim of unexpected BoE interest rate hikes

23 juni 2023

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Jim Leaviss, Chief Investment Officer Fixed Income at M&G, comments on the Bank of England rate hike.

'The market reaction to the unexpected rate hike (28/28 Street economists predicted +25 bps, not +50 bps) has been relatively modest – the sell-off in short dated gilts is small – only up 5 bps now – and the yield curve has flattened, with long dated bonds down in yield (30 years – 4bps). The £ is flat to marginally higher on the day.

This is obviously bad news for mortgage holders in the UK, and especially those on variable rate mortgages or needing to refix this year or in 2024 – and it seems difficult to see how the UK can avoid a downturn – house prices are likely to fall, and consumption on discretionary goods will be hit as monthly mortgage payments rise substantially. The Bank has now hiked for 14 months in a row, and yet core inflation remains high and is rising, so it’s not hard to see why the Bank felt it needed to accelerate its rate hiking once more, although the view that it is trying to engineer a recession to kill inflation puts it in a terrible place.

If rates average 5.5% for about 3 years, as the Bank suggests, the mortgage pain will be pretty persistent.  Markets expect a peak in rates of 6% by December this year.  It feels though that we will see an economic slowdown, and that should bring inflation down too, and if that happens you could expect rate cuts in 2024.  The bad news for the Bank and the Government though will be that many mortgage holders will have fixed at the peak of the rate cycle – and won’t therefore benefit from cuts to the full extent.  

UK inflation expectations, as measured by the breakeven inflation rate derived from index linked bond prices are only marginally down today.  At 5 years they are at 4.08% on an RPI basis (so implying about 3% on a CPI basis) on average over the next 5 years.  In other words, markets do not expect the BoE to hit its inflation target on average over that period.'

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