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BoE increases base rate by 25bps to 4.25%.

The Monetary Policy Committee (MPC) has further increased the base rate by 25 bps to 4.25%. This follows February’s surprising inflation figures, revealing an increase to 10.4% up from 10.1%.

Price stability remains the primary macroeconomic objective of both the U.S and the UK, evidenced by an increase in the base rate despite growing concerns around the stability of the global banking system. Rate hikes attributed to the collapse of the two American banks; Silicon Valley Bank (SVB) and Signature Bank. Rising interest rates decrease the value of the bonds held at banks. These losses are largely synthetic without a situation in which they need to sell the bonds to raise liquidity. Amid concerns of declining asset values, SVB faced $42billion in withdrawal requests, causing a liquidity crisis. It is highly unlikely, however, that the failure of these two banks will have any major contagion effect on the banking system. Unlike SVB and Signature, the majority of banks hold far greater reserves to prepare for a liquidity crisis and aren’t as exposed to risky, high growth start-ups. Effective hedging strategies implemented by more sophisticated financial institutions mitigate the risk of a loss of confidence, as recently seen with the enforced bail out at Credit Suisse.

We have seen the UK housing market cool slightly over previous months as the cost of borrowing has increased. As with the previous 10 base rate increases, those on variable rate or tracker mortgages will imminently face higher monthly mortgage payments. 5-year fixed rates remain lower than 2-year fixed rates, a stark contrast to what we have seen in recent years. One can conclude that lenders are expecting rates to fall in 2024, hence the discrepancy in pricing. The recent slump in housing transactions can be largely attributed to Q4 of 2022, due to the lag effect of data collection, it is only now that these figures are being observed.

The increase has been widely expected by those across the financial services sector. As such, I expect to see little fluctuation resulting from today’s news. We still expect further increases to 4.5%-5% before we see rates start to come down.


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