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Long and slow road back to rate normality

Jonathan Samuels Jonathan Samuels
Posted on Feb 20, 2018 | in Blog

The biggest piece of economic news affecting the property market during February so far is almost certainly the hint by Bank of England governor, Mark Carney, that rates may rise sooner than expected — and that there may be more hikes than markets had originally priced in.

If only he'd put it that way, of course. Instead, and in a convoluted language that few outside the ivory towers of Threadneedle Street will ever understand, he observed that "in order to bring inflation back to target, it is likely to be necessary to raise interest rates, to a limited degree, in a gradual process, but somewhat earlier and to a somewhat greater extent than we had thought in November.”

Either way, the long and the short of it is that stubbornly high inflation means more rate rises are almost certainly on the way in 2018, and potentially two of them by the end of the year.

The expectation is for one hike in May and another in November, although some observers, including former Monetary Policy Committee member, Andrew Sentance, are even pencilling in three given the health of the global economy.

Now as a rule of thumb, rate rises aren't great news for the property market — for the simple fact that they drive up borrowing costs. But sentiment to date appears to have stood relatively firm, and for good reason. After all, even if we get three quarter point rate rises this year, that will still only take Bank Rate to the heady heights of, well, 1.25%.

In short, while borrowing costs will go up, they'll still be insanely low by historical standards - so there's no reason to think that even three rate rises this year will hole the property market under the waterline.

In fact, many would argue that this kind of gradual return to historically normal rates is exactly what's needed -  because rates have been abnormally low for too long. And if inflation drops as rates rise, which most expect it to, that will clearly mitigate the higher cost of borrowing.

For 10 years we have lived in an artificial interest rate environment. But 2018, as things stand, looks set to be the year when we genuinely start the slow and long road to rate normality — which in the long term will be to the benefit of all.

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