December’s rate hike makes January a unique opportunity for borrowers

As published in PrimeResi on 21st December 2021

I don’t know if the IMF sends Christmas presents but if it does, I’d speculate that a stack of behavioural economics books is on the way to Bank of England governor Andrew Bailey, says Alex Ogario, Head of our Private Office.

The group’s warning to Threadneedle Street policymakers about “inaction bias” was an extraordinary rebuke to a central bank stuck between a rock and a hard place. Data published last week revealed unemployment has fallen despite the wind down of the furlough scheme and inflation hit an eye-watering 5.1%, yet large parts of the economy remain vulnerable to Omicron, about which we still know too little.

The IMF’s reference to people’s propensity to do nothing when they should take action was a clear signal that it views inflation as the bigger threat to financial stability than Omicron and the Bank of England clearly agrees. By raising the base rate to 0.25% on December 16th, the Monetary Policy Committee once more confounded markets, which had misread the hold in November then pegged the probability of a December hike at just 35%.

December’s rise is largely priced in, but with inflation set to hit 6% by April there is clearly more to come

Mortgage rates have been steady at the private banks and rising on the high street for several weeks – an overreaction to the hike-that-wasn’t in November. As a result, December’s rise is largely priced in, but with inflation set to hit 6% by April there is clearly more to come.

That makes January a unique proposition for borrowers. Following two boom years and a hike in the base rate, housing market activity will almost certainly recede to more long-term norms during 2022. Lenders get hit with new targets in January and CEOs will want to make hay while the going is good. Most will hold rates low in order to gain market share during the early weeks of the year.

As with so many of the pandemic’s economic themes, the opportunity isn’t constrained to the UK, though few groups are likely to have a window as narrow. Inflation in the eurozone is running at 4.1% and the European Central Bank is under growing pressure to hike rates, though it remains scarred by its premature decision early in the eurozone debt crisis.

Likewise, the Fed has been dining out on humble pie for several weeks after ditching its long-held narrative that inflation is transitory. Its dramatic shift in strategy culminated last week in new interest rate forecasts preparing the market for as many as three rate hikes next year.

The Bank of England’s decision to become the first of the major central banks to hike is likely a small moment in a much longer shift. Along with the IMF’s warning about inaction bias came a recommendation that policymakers “lay the groundwork with markets for potentially more frequent policy moves.”

The IMF is forecasting inflation will remain above the BoE’s target until 2024 and it’s clear a notch up to 0.25% isn’t going to be a magic bullet. It’s likely we’ll see further rises over the course of the year, making January the opportune moment for borrowers to strike.