8:18 am, September 7, 2023
The UK is approaching the peak of interest rate hikes, the Bank of England governor has said.
Speaking to MPs on the Treasury Committee yesterday, Andrew Bailey said the UK is ‘much nearer’ the top of the hikes.
Interest rates currently stand at 5.25 per cent after 14 consecutive rises by the Bank’s monetary policy committee.
The rises have made the cost of car finance more expensive and punished those on variable rate mortgages.
The Bank has been trying to tame inflation through rate rises, in the hope people will save more and spend less leading to suppliers being forced to cut prices to stimulate demand.
Bailey, pictured above, said: ‘There was a period where it seemed to me to be clear that rates needed to rise going forward and the question for us was how much and over what timeframe.
‘We’re not, I think, in that place any more and that’s why we shifted our language to being much more evidence and data-driven.
‘I think we are much nearer now to the top of the cycle.
‘I am not, therefore, saying that we are at the top of the cycle because we still have a meeting to come. But I think we are much nearer to it, on interest rates, based on the current evidence.’
Markets had priced in two more rate rises from the Bank this year pushing rates to what they believed would be a peak of 5.75 per cent.
However, inflation is falling and has dropped from a peak of 11.1 per cent in October to 6.8 per cent in the most recent Consumer Prices Index (CPI) figures. The Bank is targeted to keep inflation at two per cent.
Bailey said he stood by earlier forecasts that inflation will fall sharply towards the end of the year. But he warned there could be an uptick in August after recent fuel price rises.
Bailey added: ‘It is possible that we will get a tick-up in the next release, as fuel prices went down in August last year, but up this August.
‘I will add that the August monetary policy report does not have a recession in it, but it has a very weak growth path.’
Bailey stressed that no decision has been made on interest rates prior to policymakers meeting later this month.
Bailey also told the MPs that he was surprised by the continued pressure from wage bargaining by private-sector workers on UK inflation in recent months.
The governor previously said that price and wage increases are ‘unsustainable’ as he urged employers not to raise wages higher than the level of inflation.
Last week, the Bank of England’s chief economist Huw Pill said he favoured keeping rates higher for longer.
He said he believes rates need to stay ‘sufficiently restrictive for sufficiently long’ and warned that there could be ‘unnecessary damage’ caused by the Bank doing ‘too much’.
Darren Sinclair, of motor retail tech specialists iVendi, said he thinks rate rises will lead to a competitive market in the car finance sector.
He said: ‘Our view is even if we see a further base rate rise, perhaps by another 0.5 per cent, it is probable that market forces will see motor finance providers start to become more assertive about new business, perhaps as soon as Q1 of next year.
‘What we will probably see is greater competition as the market starts to see a higher quantity of lower value financing, and this could lead to responses such as a reduction in APRs or the introduction of other incentives to attract consumers.’
Rachael Jones, director of motor finance for Auto Trader, added: ‘Despite the average new and used car APRs increasing over two and one per cent respectively over the last 12 months, the effect on monthly car payments has limited; around an additional £8 over the same period for the average second-hand car bought finance.
‘On our marketplace, the recent rise has done little to dampen demand – we’re seeing record levels of engagement with our finance calculators as more people look to finance to fund their next car purchase.’
Separately this morning, the latest data from Halifax shows house prices fell 4.6 per cent year on year in August.
The UK’s biggest mortgage lender’s data points to the biggest decrease since 2009. House prices directly impact consumers’ confidence and falls can lead to many putting off big ticket purchases, such as cars.
Additional reporting: PA Media
