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Unexpected Inflation Surge: Mortgage Rates Increase Again

inflation

In response to inflation figures surpassing expectations this week and leading to revised forecasts of future UK interest rate hikes, mortgage expenses are on the rise. Various lenders have implemented price hikes for new mortgage deals, with Nationwide being the most notable, raising rates by as much as 0.45 percentage points on Friday.

These developments align with the anticipation that the Bank of England will need to increase interest rates beyond previous estimations.

Background

Official data revealed that UK inflation in April exhibited a lesser-than-anticipated slowdown to 8.7%, while core inflation (excluding volatile factors like food and energy) reached a 31-year peak. Consequently, the markets experienced significant turbulence in recent days, as described by Luke Hickmore, the investment director of fixed income at Abrdn, that the past few days have been “pretty tumultuous”.

This reaction stems from the market’s belief that the Bank of England will be compelled to raise interest rates beyond their current 4.5% level, potentially reaching as high as 5.5%. These shifting expectations have triggered substantial fluctuations in prices and interest rates within the bond markets, subsequently impacting mortgages. Lenders have witnessed an increase in so-called swap rates, which are employed to determine the pricing of home loans.

Earlier this week, Barclays’ CEO, CS Venkatakrishnan, cautioned that UK homeowners and renters were experiencing a significant income shock due to the impact of rising interest rates on mortgages and monthly expenses. He highlighted that mortgage payments and rent were now consuming a larger portion, estimated between 28% and 30%, of people’s income, compared to an average of 20% in previous years.

Responding to this week’s inflation figures, several lenders such as Nationwide, Lloyds, and Halifax have either increased rates or withdrawn products from the market, as reported by financial data firm Moneyfacts.

Responses

Chancellor Jeremy Hunt expressed his support for raising interest rates as a measure to combat surging inflation and escalating prices, even if it carried the risk of pushing the UK into a recession. Hunt has emphasised that the reduction of high prices, which contribute to the cost of living crisis, was crucial for achieving sustainable economic growth. When questioned about his comfort level with the Bank of England taking action to lower inflation, even if it resulted in a recession, Mr. Hunt affirmed his agreement, stating, “Yes, because ultimately, inflation is a source of instability.”

According to Mohammed El Erian, the chief economic adviser at Allianz, the Bank of England has no alternative but to further increase interest rates. However, he also emphasized the need for additional efforts from the government, including enhancing productivity, improving supply chains, and enhancing the functioning of the labour market, to avoid a situation where the Bank of England inadvertently triggers a recession.

Rising prices: what’s to blame?

Price increases in the UK has been partially driven by increased food costs. However, Simon Roberts, the CEO of Sainsbury’s has argued that supermarkets were not exploiting high inflation rates as an opportunity to generate higher profits.

Supermarkets experienced increased sales as part of a broader recovery in retail sales in April. Official data from the Office for National Statistics revealed a 0.5% increase in sales volume last month, following a decline in March attributed to adverse weather conditions.

Final thought

Although the current situation does not resemble the chaos after the mini-budget Liz Truss’ government announced last year, inflation is still negatively impacting people and has been for too long. The Government must do more to shield the population.

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