What do the Bank of England’s predictions for 2017 mean for homeowners?

What do the Bank of England’s predictions for 2017 mean for homeowners?

September 28, 2017


For the past several years, interest rates have remained at historically low levels; the Bank of England’s decision to reduce their base rate to just 0.25% in summer represented a further step to try and balance the UK economy, and fears and uncertainty over Brexit have caused inflation to remain extremely low.

However, the Bank of England released a statement recently which revised their predictions for inflation during 2017 to a higher level, as the economy feels the impact of the sterling’s fall against the dollar and euro. As well as ruling out any further reductions to their base rate for the rest of the year, the Monetary Policy Committee also revised their predictions for the UK economy in years to come.

Firstly, the Bank of England’s prediction that inflation will increase to 2.7% represents a drastic increase from its current level of 1%. As the Bank’s inflation target is 2%, and its primary means for reducing inflation is through increases in its base rate to reduce lending, this makes it likely that interest rates will also rise in the coming year. This is bad news for homeowners, who have enjoyed several years of low interest rates bringing their mortgage payments down, and will now likely feel the effects of growing interest rates as banks pass the costs on to their customers.

Another key aspect of the Bank of England’s recent statement is the revised predictions for the health of the UK economy going forward; overall economic growth had been estimated at 1.8% during the coming year, but this has now been revised to 1.5%. In the wake of the decision to require a vote on the conditions under which Article 50 is triggered, uncertainty over Brexit negotiations looks likely to feed further difficulties for the economy.

Primary amongst these is the reduced value of the pound against imported goods; as the value of sterling decreases relative to foreign currencies, it becomes more expensive to buy products from foreign suppliers. What this means is that overall prices for everyday goods will increase; though you may not purchase much from abroad, many everyday items are shipped in for other countries, and as the costs of these increase UK retailers are forced to raise their prices. This is a concern for homeowners as much as the potential rise in interest rates is, as an increase in the cost of living makes it harder to pay a mortgage.

There was some good news, though, as the Bank of England pointed out that the UK economy had generally weathered the storm over Brexit better than expected, with house prices especially holding value well. Mark Carney, the Governor of the Bank of England, also pointed out the general volatility and unpredictability of economic performance in times of such uncertainty, saying that this was simply “just one of many twists and turns that are likely to happen” as the UK leaves the European Union. This points out the difficulty of maintaining any concrete predictions when every month seems to bring new ups and downs; though inflation may be set to rise sharply next year, this is a particularly difficult time for estimating the course of the economy, as the country undergoes major change.

First time buyers and those looking to make a purchase would be well advised to consider this when deciding whether or not to buy a home. What’s affordable today with record-low interest rates might become difficult to cover if rates should rise; it’s always wise to build a little elasticity into your budget, and especially so when the economy is in a state of flux.