News in Charts: The Bank in a bind

The Bank of England (BoE) is in a bind. Should it hike interest rates further and risk sinking the housing market, and perhaps the economy? Or should it sit tight and hope that inflation comes down on its own — but risk even higher inflation and bigger economic problems further down the line?

The Bank has not exactly been sitting tight over the last year or so – it has raised Bank Rate from 0.1% to 5.0% since November 2021. But clearly, it has not raised interest rates fast enough to root out inflation, which is both a lot higher and falling a lot more slowly than in other advanced countries. Even more worryingly, core inflation is rising, not falling.

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These factors explain why the BoE increased bank rate by 50 basis points to 5.0% on Thursday, and why it signalled further tightening may lie ahead. The speed of rate increases, while notable, have however not been as fast as in previous tightening cycles.

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Although interest rates are still firmly negative in real terms, the BOE’s nominal rate increases have turned the housing market. As the charts show, on both the Nationwide and Halifax measures, prices are now lower than they were a year ago. Mortgage approvals are also lower than trend.

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Some variation in house prices is not a bad thing and a widespread housing crash, and banking crisis, do not appear imminent. The resilience of economic activity is more surprising; the increase in interest rates has meant that those who have had to refinance their mortgages are now paying hundreds more per month in interest, reducing their disposable income for other purchases. A recession has been avoided for now, despite being widely predicted by economists. This may yet come, especially with bond yields and mortgage rates continuing to climb. This will squeeze households further; while at the same time pandemic savings pots, which can be used to smooth consumption, are being reduced.

The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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