The squeeze on UK finances is set to intensify after a key mortgage rate climbed to its highest point this year and the cost of government borrowing reached a level not seen since the financial crisis.
(Bloomberg) — The squeeze on UK finances is set to intensify after a key mortgage rate climbed to its highest point this year and the cost of government borrowing reached a level not seen since the financial crisis.
The average two-year fixed-rate home loan jumped above 6% Monday, edging closer to the 14-year highs reached at the end of 2022, according to Moneyfacts Group Plc. Separately, the yield on same-maturity government bonds advanced to 5%, the highest since 2008.
The sharp moves in borrowing costs, which are raising costs for home buyers, companies and the government, come ahead of crucial inflation data Wednesday and the Bank of England’s decision Thursday, with officials set to raise interest rates by another quarter-point.
It’s an additional complication for Prime Minister Rishi Sunak, whose party is lagging behind Labour in polls as he tries to deal with divisions in the ruling Conservative Party and the worst cost-of-living crisis in a generation.
The UK housing market is under particular pressure from a triple whammy of pricey borrowing, economic uncertainty and high inflation. While the average two-year fixed-rate home loan surpassed 6%, the five-year fixed-rate deal climbed to 5.67% after breaching 5.5% for the first time since January last week.
Read more: What 6% Mortgage Rates Mean for Your Money: Money Distilled
The surge in rates has prompted some of the biggest lenders — including HSBC Holdings Plc and Banco Santander SA — to temporarily pull products from the market earlier this month.
All eyes now turn to two crucial moments this week, when inflation figures and a BOE policy decision could combine to set the scene for larger house price declines.
Core inflation — which strips out more volatile components — is expected to hold steady at the highest in over four decades, even as the headline number is forecast to have slowed slightly in May. That risks prompting a more hawkish response from officials struggling to curb consumer prices.
“Another strong core inflation print could prompt a few more votes for a 50 basis point hike this week,” said Daniela Russell, head of UK rates strategy at HSBC Bank Plc. She said yields can keep climbing, unless the BOE turns dovish or there’s a sharp deterioration in economic data.
Traders are fully pricing a quarter-point hike by the BOE this week and attribute a one-in-five chance of a bigger half-point move, according to swaps tied to BOE meeting dates. Money markets expect the policy rate to peak at 5.75% by year-end, with a one-in-two chance of a final increase to 6% by early next year.
Read more: UK Yields Jump to Highest Since 2008 With 6% Peak Rate in Play
Rising rate-hike bets are behind the poor performance of UK government bonds this year, with the two-year yield up more than 140 basis points. Yields even surpassed the peaks reached on the fallout of then-Prime Minister Liz Truss’s controversial spending plans.
“There is no obvious near-term trigger to reverse the recent cheapening,” according to Imogen Bachra, head of UK rates strategy at NatWest Markets. “Certainly for the marginal investor in gilts, headlines around reaching post mini-budget highs are more likely to be a cause for concern than encourage demand, despite how cheap they might look.”
Economists are warning that the UK economy faces a flood of job losses if interest rates hit the level financial markets believe is on the cards. That’s likely to spell more pain for millions of families, which are already bracing for what the Resolution Foundation describes as a “a prolonged and historic mortgage crunch.”
The threat of home-price declines is already taking shape in London, where sellers cut prices more than any other region in June. Asking prices in the capital slid 1.6% from May, according to property portal Rightmove.
“House prices are determined by house sales, if you can’t get a mortgage, you can’t buy a house,” said Anthony Codling, a former Jefferies housing analyst who now runs property website Twindig. “The upheaval in the mortgage market will, in my view, lead to a bigger reduction in housing transactions than house prices.”
–With assistance from Greg Ritchie and James Hirai.
(Recasts story throughout.)
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