Market Update - November 2023

The latest commentary on the UK economy, mortgage and savings markets.

  • Bank Rate held at 5.25% and is unlikely to fall for some time despite weak economy
  • Inflation to remain high in short term, and fall back to target by the end of 2026
  • Mortgage approvals fall to lowest level in seven months in September
  • Household savings rebound strongly and increase by £18 billion in September
Bank Rate to remain higher for longer and growth to remain flat

1.    The Governor of the Bank of England promised to keep interest rates high enough for long enough to get inflation back to 2.0% as the MPC announced the Bank Rate would remain unchanged at 5.25% on 2 November 2023. With inflation forecast to remain above target for some time the Governor says it’s far too early to think about reducing rates despite the impact higher rates are having on economic activity - which is now expected to be weaker than previously expected. The Bank’s latest forecasts published in the September Monetary Policy Report show the economy narrowly avoiding a technical recession but experiencing more or less zero growth over the next two years, before growing by 1.1% in 2026.

2.    Based on historical relationships between Bank Rate and the wider economy, the Bank believe over half of the impact of higher rates is yet to be fully felt, and the full impact won’t be realised until 2025.

3.    Because the stock of household savings exceeds the stock of mortgages, the rise in interest rates has increased average household incomes overall. This has been amplified because over four fifths of mortgages are on fixed rates, many of which are fixed at rates far lower than current savings rates. However the Bank expects the reduction in consumption from rising mortgage costs to outweigh the boost to aggregate consumption from higher savings income as net borrowers tend to reduce consumption in response more than net savers increase consumption due to higher earnings on savings.

4.    The Bank expects the impact of higher mortgage rates to increase into 2024 as borrowers see the end of their fixed rate deals approaching. The Bank’s survey work has found that 30% of borrowers who are yet to come to the end of their deals have already reduced their spending in anticipation. In contrast, about two-fifths of these borrowers don’t expect to reduce their spending over the next year because of higher mortgage rates.

5.    A resilient labour market and strong wage growth has supported households as interest rates have risen. Annual growth in regular pay (excluding bonuses) was 7.8% in June to August 2023, similar to recent periods and one of the highest growth rates since comparable records began in 2001. Though there are some questions about the reliability of the data, wage growth is projected to remain high and above inflation in the near term, supporting real income growth.

6.    A BoE survey also shows that households are relatively optimistic about their future finances, and this optimism has increased so that it is now in line with pre-pandemic levels. However the headwinds facing households could be strong. Unemployment has started to pick up, and in June to August the unemployment rate was 4.2%, up from 4.0% in the previous three months. Unemployment is now expected to be higher than previously thought over the next two years. In addition the government support packages to assist households with the cost of living will soon be withdrawn. 

7.    In the 12 months to September CPI inflation increased by 6.7%, the same as August, and core CPI fell slightly to 6.1% in the year to September from 6.2% in August. The MPC believe the risks to inflation remain skewed to the upside, with second round effects in domestic wage and price setting taking longer to unwind than they did to emerge. The ongoing conflict in the Middle East may also provide additional upside risks from rising energy prices. CPI is expected to be above target at 3.4% in Q4 2024, 2.2% in 2025 and then fall below target to 1.9% in Q4 2026.

8.    he MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time and further tightening may be required if there were evidence of more persistent inflationary pressures. The Bank is looking at wage growth and services price inflation in particular. There are also upside risks to inflation from energy prices, due to events in the Middle East.

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.