The bank predicts the UK economy will be in recession through 2023 and the first half of 2024 

The Bank of England has today raised the base interest rate 0.75% to 3% to curb spiralling inflation, which hit 10.1% year-on-year in September. 

Bank of England Threadneedle st

Rising mortgage rates were expected to “weigh on household spending for sometime”, the monetary policy report stated. Although, it also said that the “sharp tightening in mortgage availability seen during late September is not assumed to persist over the forecast period”. It noted there had been “moderate falls in some mortgage rates in the days leading up to [today]”.

But the UK economy is expected to remain in recession throughout next year and the first half of 2024, the bank warned, as prices for energy, food and other bills continue to rise. 

“Inflation is too high. It is well above our 2% target,” the monetary policy committee wrote in its report.

“Raising interest rates is the best way we have to bring inflation down.”

The committee’s central projection is for GDP growth to be -1.5% in 2023 and -1% in 2025. The bank expects GDP growth to go up around .75% in 2025 but it will “remain well below pre-pandemic rates”. 

>>See also: Can housing associations keep development going as the rest of the market slows?

Tim Bannister, Rightmove’s director of data services, said: “The era of historically low interest rates looks to be over, which is making it more challenging for those new first-time buyers who are stretching themselves financially to try and get out of the frenzied rental market and onto the housing ladder.”

Richard Donnell, executive director of Research at Zoopla said the markets has been expecting a ‘hefty jump’ in the base rate. ”Most borrowers use fixed-rate loans so it’s the cost of 2 and 5 year fixed rate money for banks that underpins mortgage rates more than the base rate. Today’s jump does not worsen the outlook for mortgage borrowers but home buyers need to realise that 4-5% mortgages are set to be the norm in future, not the 1-2% of recent years.”

The chancellor Jeremy Hunt reacted saying: “Sound money and a stable economy are the best ways to deliver lower mortgage rates, more jobs and long-term growth. However, there are no easy options and we will need to take difficult decisions on tax and spending to get there.”

Housebuilders share prices dropped today in anticipation of the base rate rise.  Estate agent Savills predicted house prices would drop by 10% next year with mortgage rates increasing and the worsening cost of living crisis. 

The base rate will next be reviewed on 15 December.