It has been an eventful start to November, following a full-on October that generated pleasing returns for investors in global capital markets (see table left). The financially interested UK public will have focused on the first interest rate rise in the UK for more than a decade – by 0.25%. Two weeks ago, we had covered the UK’s developing inflation and interest rate dynamics in our second article and strongly suggested that this 0.25% rate rise would happen this week. Our readers will therefore have been as unsurprised as markets were and so the little market reaction there was to the announcement by the Bank of England (BoE) on Thursday was actually a small but still counter intuitive decline in short term yields and £-Sterling.
This would have been a reaction to what one City commentator called the ‘least committed rate hike we could have expected’ – on the basis that the BoE’s accompanying comments focused more on the weaknesses of the UK’s economic situation – hardly a backdrop for further rate rises next year. Nevertheless, the rate setting committee’s indication that another two 0.25% rate rises over the next 24 months (!) were likely, may still be sufficient to prevent a deterioration of £‑Sterling’s value beyond the recent lows. This in turn could indeed be the best medicine of the UK’s central bank against further inflationary pressures which thus far have not been caused by rising wages, but increasing prices of imported goods.
So, is there now the risk of increasing pressure on the mortgage laden UK public, which would further undermine the UK consumers’ propensity to spend? Well, at this pace probably little. The BoE itself estimates that the average mortgage burden will increase by £15 per months. But even from that angle, the Financial Times reported that due to lower home ownership, only 24% of UK households now even have a mortgage (compared to 34% in 2000) and only 9.6% remain on variable rate mortgages, while the over 14%, who are on fixed terms, will initially be unaffected.
