In early May, the Bank of England (BoE) raised the UK base rate from 0.75% to 1.00%. While this is still a very low base rate by historical standards, it is widely expected to be yet one more increase to the UK base rate that the BoE are implementing to try and slowdown the rate of inflation.

Less than a week after the announcement, ex-policymakers warned that the BoE interest rate could hit 4% or more. “In my view the nominal interest rate - the short-term interest rate the MPC (Monetary Policy Committee) controls - will have to go up at least 250 to 300 basis points from here,” Adam Posen, who served on the MPC from 2009 to 2012, told the British parliament’s Treasury Committee.

That would mean an interest rate of 3.5% to 4.0%, which is well above the 2.5% peak that was previously priced in by financial markets for June 2023. But it is also worth remembering that since the BoE was founded in 1694, on average its base rate has been in the 4.50-5.00% range.

Charles Goodhart, who served on the BoE’s first MPC after it gained independence in 1997 and has taught at the London School of Economics, speculated that rates might need to go even higher. “It will take nominal interest rates well above 4% to actually start having a significant effect on the housing market, and my bet would be that we will go over 5%,” Goodhart told the parliamentary hearing into inflation and economic policy.

Mortgage rates have already started to rise, with early May data from Moneyfacts showing that the average standard variable rate in the UK was 4.78%, which is almost 3.8% over the current base rate.

We are still a long way from the early-1990s
While returning to a base rate of 5% and mortgage rates of 8-9% is no doubt a terrifying thought for some homeowners and landlords that are highly leveraged, the average outstanding balance on a fixed-rate mortgage in the UK is £160,000, according to UK Finance, while for tracker mortgages it is lower at £121,000 and for standard variable rate mortgages it is lower still at just £77,000.