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Curbing inflation may cause financial stress

The theory behind the latest base rate rise is that inflation is running at a higher level than the Monetary Policy Committee would like.

Consequently, rates have had to rise to curb increases in the prices of commodities and services, the most notable of these commodities being housing.

There’s been a lot of sensationalist press coverage on this subject recently but here’s a simple question – will base rate increases slow house price growth?

The theory is that a rate rise will increase mortgage payments. As a consequence, buyers can borrow less to maintain an affordable level of repayment.

So on a national level a rate rise will mean that there will be less cash available to buy houses.

Sellers will have to lower asking prices if they want to sell and so house price growth will stabilise or even fall. The MPC thus achieves its target in reducing a key driver of inflation.

A major problem with this app-roach is that it affects all parts of the UK equally yet the housing market varies hugely by region.

For example, London is still seeing sustained house price rises while some other regions are not. More importantly, affordability is not uniform either.

Even if rate rises operate according to the theory above and eventually rein in house price growth, they will also hurt those overstretched borrowers who already have mortgages.

Arrears data following the November rate rise showed that the number of borrowers going from performing status into arrears increased.

The number of customers repairing arrears and returning to performing status declined.

This shows that customers who are already at the limit of their financial resources – be it through bad luck or simple mismanagement – will be immediately affected by a rate rise.

Next month, I expect to see further marked shifts in both numbers. If rates rise again the arrears situation will worsen.

So London bankers enjoying record bonuses are fuelling sustained price rises in London and the South-East. But across the country those borrowers who are in more difficult circumstances are going into arrears.

Another rate hike may convince a City banker to borrow less and opt for one less bedroom in their new mansion but it will push an inner city nurse into arrears on their studio flat.

Rates are likely to rise again in the next few months as the MPC seeks to control inflation. These hikes may in time curtail house price growth and stabilise inflation. But they will have an immediate negative impact on a large number of existing home owners. By the time inflation has stabilised, the damage will have been done.

The MPC has to think of the economy as a whole when determining monetary policy but it is an unfortunate fact that many borrowers will be negatively affected by anti-inflationary measures.

Another rate rise may be in the best interests of the UK economy but credit management departments across the country might need to be at their best in the coming months, as another rise will push more borrowers into arrears.


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