Banking shares were broadly lower after the Bank of England's rate rise on fears that a slowing economy would lead to a collapse in the housing market, rising unemployment and increased business failures while a leading economic think tank said millions of homeowners face misery if interest rates keep on rising.
The NIESR warned households would come under severe pressure if UK interest rates were to rise as high as 5% with variable rate mortgage repayments potentially doubling affecting the 2.5mln UK households on a variable rate mortgage.
It said on average, the monthly repayment on a typical variable rate would rise from around £500 to over £1,000 while around 30,000 households could see monthly mortgage repayments greater than their monthly incomes.
Max Mosley, NIESR economist, explains: “This shock to mortgage repayments, in combination with a decade of stagnant real incomes, the impact of Covid-19, inflation and a cost-of-living crisis, presents an unprecedented assault on the country’s living standards.”
This could help explain what Michael Hewson chief market analyst at CMC Markets UK called “Operation Protect the Housing Market.”
He explained that after the announcement of the 75bp rise the Bank "spent the next hour undermining that hawkish move."
He said: "The key message was that rates were unlikely to go anywhere near as high as markets were pricing, although they were still expected to rise, and that the UK economy was likely to face a 2-year recession."
In an unusual move the Bank stressed it didn’t think interest rates would go as high as some in the market expect throwing some cold water on the flamers ignited by the 75bp hike.
The equity market took the news well and rallied, recouping earlier losses, but sterling sank as traders contrasted the approach of BoE governor Andrew Bailey to that of super hawk, Federal Reserve head, Jerome Powell.
The Bank was less positive on its views of the economy with GDP expected to fall until well into 2024 and fears of rising unemployment and increased business failures sent banks downwards with Lloyds Banking Group PLC (LON:LLOY), Barclays PLC (LON:BARC) and NatWest Group PLC (LON:NWG) all lower.