Interest Rates Increase to Above 5%

Despite the forecast interest rates from the start of the year, they have been significantly rising since May. This month alone saw an increase of 0.5%, finally hitting the 5% mark. The 5% Base Rate is the highest it has been for 15 years and the 13^th time it has increased since December 2021.

July has begun with the average rate for a 5-year fixed deal surpassing the 5% Base Rate to 6.01%. Back in October 2021, the average rate for a 5-year fixed deal was 2.55%, and the new rate has not been as high as 6.01% since 21^st November 2022. As for 2-year fixed rates, the average has surpassed 6% to 6.47%. Another shock for buyers.

This is all the BOE’s efforts to bring inflation down to 2% from its current rate of 8.7%.

But how does increasing interest rates reduce inflation?

The BOE’s interest rate increase is possibly a different tactic to address the underlining issues driving inflation. Opting for an immediate larger Base Rate over spreading rate rises over a longer period makes it more expensive to borrow money. Doing this makes saving money more worthwhile than using it, helping people spend less and allowing time for price increases to slow and cool down.

UK Interest Rate Forecast

Despite the 2023 forecast, the Base Rate is expected to rise to 5.5% on 3^rd August. However, interest rates are looking to remain in the 5-5.5% range and price falls of up to 5% are on track for this year.

The firmer pricing from this spring reveals that 4-5% mortgage rates are manageable. However, the longer rates stay over 5% or close to 6%, like the current average fixed plans, the higher the hit to buying power will occur, resulting in lower prices and sales volumes.

The highest interest rate increase yet represents a tipping point. Beyond this, house prices will fall along with sale volumes, hoping to decrease inflation.