Housebuilders boosted as Bank of England holds interest rates

Housebuilder shares have spiked for the second day in a row after the Bank of England decided to surprise the market this lunchtime by not raising interest rates, as had been expected.

Shares in both Persimmon and Barratt rose temporarily by 4% on the news, given speculation that the current 5.25% Bank of England base rate will represent the interest rate peak necessary to get persistent inflation under control.

However, the Bank’s Monetary Policy Committee did not rule out further rises in the future, and said: “Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

The base rate is a key determinant of the price of mortgages – the rising cost of which are widely seen to have driven the recent weakness in the market.

The Bank said that four members of the nine-strong MPC had voted in favour of a rate rise this month, meaning the decision to hold rates was on a knife edge.

The markets had fully expected the Bank to raise rates another quarter percentage point until much better than expected inflation data was released yesterday, which led to speculation the Bank might instead choose to hold the rates at 5.25%. The Bank’s statement made clear that yesterday’s inflation data, and particularly the sharp drop to 5.2% in core goods, had factored in its decision-making.

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Gordon Milnes at Investec Real Estate said: “Boosted by yesterday’s surprising inflation figures, this is the absolutely the right decision in the face of recent economic data. Hopefully the Bank of England can hold their nerve and this is the peak, which will be a welcome boon for investors, developers and lenders. Now we need some further visibility on potential interest rate cuts, which should act as a catalyst for a rapid bounceback in real estate activity levels.”

Lucian Cook, head of residential research at Savills, said the decision to maintain the base rate was an “important signal” to the mortgage markets. He said: “However, a material improvement in mortgage affordability requires the prospect of a cut in interest rates coming onto the horizon. That still looks some way off, suggesting buyers’ budgets are going to remain constrained and that there is a little way to go before house prices bottom out.”

Chancellor of the Exchequer, Jeremy Hunt said “We are starting to see the tide turn against high inflation, but we will continue to do what we can to help households struggling with mortgage payments.

“Now is the time to see the job through. We are on track to halve inflation this year and sticking to our plan is the only way to bring interest and mortgage rates down.”