Bloomberg Intelligence (BI) housing, real estate and construction analyst Iwona Hovenko, and senior equity research analyst Philip Richards, comment on tomorrow’s anticipated increase in interest rates by the Bank of England.

Iwona Hovenko, Property, Real Estate & Mortgage Analyst at BI, says: “The Bank of England’s 50 bps rate hike on Thursday may not change much for the UK housing market, given how widely it has been expected and it may be largely priced in already. Rather than the hike itself, the Bank’s commentary about the economy or inflation could be much more important for the future rate path and the housing market.

“A surprise 25 bps rate increase if combined with BOE comments suggesting a nearer end of the hiking cycle – which is not current consensus – would on the other hand send a much stronger message that the mortgage rates could be peaking. Any easing in mortgage rates could soften the pressure on buyers and those remortgaging, even as return to 2% rates is not expected for a long time and adjustment to the “new normal” of higher rates may still not be pain-free for the housing market.”

Phillip Richards, Senior Analyst, European Banks at BI, adds: “We expect the Bank of England to hike by 50-bp this week, lifting the rate to 4%, and then slow the pace of tightening in March, followed by a pause. A near 150 bps decline in five-year gilt yields from September’s highs, with mortgage offers reinstated at elevated loan-to-value levels suggest a degree of stabilization and a lower peak of 4-4.5%, vs. the risk of 6%-plus policy rates that seemed likely last September. Mortgage rates offered are likely to continue to edge lower and approvals are likely to pickup from lows earlier than previously expected.

“While rate hikes are beneficial for bank net interest margins, a higher pass-through of rate hikes to depositors is becoming increasingly necessary, and being pushed by regulators, driving a rise in retail-funding costs which will squeeze banks’ overall margin. UK lenders NatWest and Lloyds Banking Group have seen average gains to consensus 2023 net interest income expectations of 40% and nearly 20%, respectively, since the start of 2022 from rate hikes and rising yields, being a driver of strong revenue momentum. Yet net interest margin upgrades now look likely to peak in 4Q22 or 1Q23, with rate hikes coming to an end and deposit costs rising.”