U.K.’s Fixed Mortgages Mean Faster BOE Rate Rises May Be Needed
The Bank of England may have to raise interest rates more aggressively than in the past to tackle inflation because the volume of households on long-term fixed mortgages has blunted policy, according to JPMorgan Asset Management.
One in every six U.K. households, or two in every five mortgage borrowers, are on fixed rate deals of at least five years, figures from U.K. Finance show. While the deals protect many against the increase in living costs caused by higher interest rates, it means their spending would be largely unaffected.
With inflation on course to exceed 5% in the coming months, the BOE is expected to raise borrowing costs. Rate rises cool inflation in part by reducing discretionary spending in the household sector. But around 4.5 million of Britain’s 11 million mortgagors have tied in for five years or more.
Before the omicron variant of coronavirus emerged and new restrictions imposed, the BOE was expected to raise rates from 0.1% to 0.25% on Thursday to prevent a sharp rise in wage inflation. Household inflation expectations are creeping up and are now at their highest since August 2019, a development that is alarming central bankers.
Markets expect rates to be left unchanged on Thursday due to the newly uncertain economic outlook, and most economists agree. Policy makers, however, have warned that the consequence might be steeper rate rises later.
“Consumers and the economy are now less sensitive to potential interest rate rises than they were in the past, at least in the near term,” said Mike Bell, global market strategist at JP Morgan Asset Management. “It could imply that the BOE may have to raise rates further than markets currently expect if they want to moderate underlying inflationary pressures from a tight labor market.”
The share of mortgages on fixed rate deals of at least five years has never been higher, reflecting expectations that borrowing costs are only going to rise. Since the end of 2019, 92% of all new mortgage deals have been fixed for five years or longer, with five year rates now averaging 1.85%, according to BOE data.
The value of the UK’s total mortgage stock has increased from 1.4 trillion pounds ($1.85 trillion) to 1.48 trillion pounds in the pandemic, which sparked a housing boom that drove up prices by around 15%.
©2021 Bloomberg L.P.