Market Update - January 2023

The BSA's monthly Market Updates summarises issues affecting the main markets in which BSA members operate. 

Bank Rate rises to 3.5% as labour market tightness sees wage growth rise

  • CPI inflation falls but labour market conditions remain very tight
  • Bank Rate rises to from 3.0% to 3.5% in December and could rise further
  • Mortgage market activity falls sharply in November
  • Savings continue to grow in November despite cost of living crisis
  1. The outlook for the UK economy remains weak and households are becoming more vulnerable as interest rates rise and real incomes fall. In December the Financial Policy Committee noted that the risk of households defaulting on loans and sharply reducing their spending has increased. The FPC calculated that around half of owner occupier mortgages (approx 4 million) will be exposed to rate rises over the next year. The share of households with a high mortgage debt-servicing ratio (adjusted for cost of living) will increase from 1.7% in Q1 2022 to 2.4% over 2023, although this is still lower than the pre-global financial crisis peak of 2.8%.
  2. As demand falls so will GDP growth, and in the third quarter of 2022 GDP is estimated to have reduced by 0.3%, meaning it is now 0.8% below its pre-coronavirus level. There has been a slowing in consumer spending over 2022 as the cost of living puts pressure on households’ disposable income. In Q3 2022 real household expenditure fell by 1.1% driven by a reduction in tourism, transport, household goods and services, and food and drink.
  3. A recent study by the ONS analyses the impact of higher housing costs on both homeowners and renters. Approximately 1.4 million households in the UK are facing average higher monthly mortgage repayments of £250 when they renew their fixed rate mortgages in 2023. Renters will also face higher rents as higher costs are passed on to tenants. In November 2022, UK private rental prices saw the largest annual percentage increase since records began in January 2016 and rental prices paid rose by 4% in the 12 months to November 2022, up from 3.8% in the 12 months to October 2022.
  4. The Resolution Foundation further explores the impact of rising interest rates on households in a report published on 9 January. They calculate that rising mortgage costs will see typical incomes after housing costs among mortgagors fall by 12% over the next year. This will reduce the relative living standards advantage that mortgagors have built up over other households in the low interest rate environment since the financial crisis. The typical post-housing income of mortgagors will fall from 30% higher than the median in 2021/22 to 22% by 2024/25.
  5. Conditions in the labour market remain relatively robust, which will support aggregate household spending to some extent, and limit the number of mortgages and other loans entering arrears. However there are signs that the labour market is softening somewhat. In August to October the unemployment rate was 3.7%, 0.1 percentage points higher than the previous three month period but still 0.3 percentage points lower than the pre-pandemic period. The number of job vacancies, although still high, has reduced for the fifth consecutive rolling quarter since May to July 2022 at a peak of 1.30 million. In September to November there were 1.19 million vacancies. Redundancies also look likely to increase with the number of larger employers proposing redundancies increasing to 55 (4 week average) in December.
  6. The high number of job vacancies relative to those looking for work has put upwards pressure on wages, and average pay growth was 6.1% in August to October, although once adjusted for inflation, real pay growth was minus 2.7%. The labour market has been shrinking over past two years, mainly caused by more people aged 50-64 suffering with long term sickness or entering retirement and leaving the workforce. Greater pension freedoms combined with a shift in working patterns may be a cause of the increase in retirement in the age group. To stem the outflow of older people retiring, the government is considering plans to encourage retired middle aged workers back in to the economy.
  7. Whilst the Bank believes that the labour market has passed its peak tightness, it is unclear how quickly demand for labour will fall as labour supply falls. The latest inflation data show CPI inflation rose by 10.7% in the 12 months November 2022, down from 11.1% in October. Despite this fall in inflation the MPC deemed that there was sufficient evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and therefore justified the rise in Bank Rate from 3.0% to 3.5% in December. However, some members of the MPC had preferred not to raise rates because of the weaker outlook. In February 2023 the Bank will publish a review their judgements of the labour market and its impact on inflation, but regardless, have stated that the majority of the MPC believe further monetary policy tightening may be required.

You can download the full market update here which includes further analysis of the mortgage and savings markets and a range of charts. You will need to be logged in as a BSA Member or Associate Member to access this page.