The Bank of England’s decision to raise interest rates to 1.75% would harm borrowers in Northern Ireland, but bring limited benefit to savers, the economist said.
The move would increase the cost of home loans through variable or tracked transactions, and make other forms of borrowing more expensive for businesses and consumers alike.
It is estimated that around 85,000 of the 236,000 mortgage holders in Northern Ireland have variable or tracked mortgages. However, there are about 150,000 people, most of whom have fixed rate mortgages.
In announcing the sharpest interest rate hike in 27 years, the bank also warned that the UK could slip into its longest recession since the financial crisis, with inflation peaking at more than 13% as gas prices rise.
Decision makers in the Monetary Policy Committee (MPC) raised the bank’s benchmark interest rate in an attempt to control runaway inflation, which reached 9.4% in June.
But forecasters have warned that CPI inflation will hit 13.3% in October, the highest level in more than 42 years.
Energy prices will push the economy into recession by five quarters, with gross domestic product (GDP) shrinking every quarter in 2023.
“After that, growth is very weak by historical standards,” the bank said on Thursday.
Dr Esmond Birney, Senior Economist at the University of Ulster Business School, said: “Today’s decision by the Monetary Policy Committee of the Bank of England to raise interest rates again by 0.5% from 1.25% to 1.75% was widely expected but represents a magnification scale – twice as much. percentage point — not seen since 1995.
“Home borrowers will be affected, especially those with variable or tracking mortgages – about a third of all mortgages in New Zealand.
“Even the government will find that they will have to pay billions of additional interest on the current huge public debt.
“And all this in the context of the Bank of England forecasting that this year the average cost of fuel and heating for a British household will be £3,500 – several times higher than it was before the Russian invasion of Ukraine.
“Admittedly, those with savings accounts can make some gains, but expect growth in these rates to be low.”
He said the hike would have “painful” consequences but was a necessity, although he added that “it would have been better if the rate hike had started earlier, but that’s how we are.”
He said higher interest rates in the UK would help support the pound against foreign currencies, especially the dollar, helping to limit rising import prices, especially dollar-denominated oil.
“Secondly, the bank’s decision on interest rates is an important sign for us that they are serious about inflation; that they are determined that we will not go back to the future in the sense that we will relive the energy price and wage spirals of the 1970s. From a practical standpoint, higher rates put pressure on businesses to try to control and limit very high wage growth.”
Ruth Flynn, a lawyer at Belfast-based law firm Francis Hanna & Co, said she believes the interest rate hike will have a “limited impact” on the housing market here.
“Demand continues to outstrip supply and interest rates remain historically low. Recent changes in lending criteria may help first-time mortgage applicants. I expect yoy price growth to slow down from the recent rate of 15.2%, but don’t expect a crash.
“While higher interest rates may affect your current mortgage payment, the vast majority of mortgages are fixed rate and will not be affected. But people should keep checking when their fixed rate expires to make sure they don’t switch to their lender’s standard variable rate.
“The biggest threat to the housing market is the cost of living crisis and the uncertainty surrounding it.”
According to the Halifax Building Society, Northern Ireland has seen the biggest increase in house prices, with a 15.2% year-on-year increase through June, averaging £187,833.
The Bank of England has said that dire economic conditions will see real household incomes fall for two years in a row, the first time since records began in the 1960s. They will fall 1.5% this year and 2.25% next.
However, the recession will be at least less severe than the 2008 crash, with GDP falling 2.1% from its highest point.
Bank representatives said that the depth of the fall is more comparable to the recession of the early 1990s. Unemployment is projected to rise again next year.
The bank said it expects inflation to return under control in 2023 and fall below 2% by the end of the year.
“The UK is currently projected to enter recession from the fourth quarter of this year,” the MPC said in a statement.
“Real household income after taxes is projected to fall sharply in 2022 and 2023, and consumption growth will turn negative.”
GDP is expected to grow by 3.5% this year, the bank said, revising its previous forecast by 3.75% downward. It will then decline by 1.5% next year and another 0.25% in 2024.