September 2022 fiscal event drove market reactions and a spike in mortgage rates

The market reaction to the September 2022 fiscal event, including a spike in mortgage interest rates, drove consumer confidence indicators below their already depressed levels to the lowest level on record at the end of the third quarter of 2022, according to UK Finance's Household Finance Review for Q4 2022, published in March 2023¹. The rapid unwinding of most of the announced measures restored market confidence, with gilt yields and mortgage rates moving back towards their pre-event levels, but household confidence in the economy saw only a modest uptick in the final quarter and remained well below previous lows¹.

Confidence in households' own financial position continued to fall even as sentiment about the wider economy recovered slightly. UK Finance said this divergence may reflect cost-of-living pressures, from both inflation and the Bank Rate increase of 0.75 percentage points in November 2022, the largest since the late 1980s, feeding through to borrowers' budgets in the final quarter¹. The review said this measure had already fallen by the same amount as during the global financial crisis of 2008 to 2009, but from a higher base and in less than half the time¹.

The review also set out the wider economic backdrop. Despite headline growth of four per cent in 2022 compared with 2021, the economy was fractionally smaller in December 2022 than in the same month a year earlier, though the UK avoided a technical recession, defined as two consecutive quarters of falling GDP¹. CPI inflation appeared to peak at just over 11 per cent in October 2022 and edged down in the following months, while food price inflation continued to accelerate in December¹. At its February 2023 meeting, a majority of the Monetary Policy Committee judged that a further 50 basis point increase in Bank Rate, to four per cent, was necessary to bring inflation sustainably back to target¹.

On borrowing, UK Finance reported that personal loan borrowing fell sharply in the quarter, while borrowing for house purchase remained broadly in line with pre-Covid levels, with weakness expected ahead¹. Refinancing stayed strong, but the review flagged challenging prospects for the 1.8 million fixed rate mortgage deals due to mature through 2023, which it said may drive business further into internal product transfers that are not subject to affordability tests¹. More than a third of new loans to movers extended beyond 30 years, meaning the average mover would be well into their 70s before the loan is paid off¹. Unsecured debt stress indicators were stable, but headline mortgage arrears saw a modest increase, although numbers were down compared with the end of 2021¹.

Why it matters for households

The confidence and rate movements described here fed directly into household budgets. The November 2022 Bank Rate rise of 0.75 percentage points was the largest since the late 1980s and affected borrowers through the final quarter of the year¹. For the 1.8 million fixed rate mortgages maturing during 2023, the review noted that internal product transfers, which are not affordability tested, were likely to take a greater share of refinancing as affordability tightened¹. Longer terms were already spreading: over a third of new loans to movers ran beyond 30 years¹. Arrears rose modestly in the quarter, and UK Finance said it expected further increases through 2023, though it expected numbers to peak at relatively low levels and well below previous cycle highs in the absence of unexpected adverse shocks¹. The review also noted that the industry announced a voluntary pause on possession activity over the festive season¹. Higher savings accumulated during the pandemic remained unchanged at that point, though UK Finance said more households might need to draw on them as cost-of-living pressures persisted through 2023¹.

What happens next

UK Finance said the next moves on Bank Rate were not clear cut, and noted a further fiscal event was in the calendar, with early indications that the cost of the government's energy support packages would be less than originally forecast¹. It said borrower interest in house purchases was not expected to come close to the levels of the previous two years, despite anecdotal evidence of a recovery in January 2023¹. The Bank of England forecast GDP to fall by 0.5 per cent in 2023, with unemployment expected at around 4.3 per cent at the end of that year¹.