Bank votes for a mid-winter shock

Ray Boulger of John Charcol, the UK’s leading independent mortgage adviser, comments on today’s decision by the Monetary Policy Committee (MPC) to increase Bank Rate by 0.25% to 5.25%.

“Money markets were fully expecting another 0.25% increase but not until next month. Nine of the last eleven Bank Rate changes have occurred in a month when the quarterly inflation report was published and so an increase this month is out of character. Furthermore, the impact of November’s increase has yet to be reflected in the house price indices.

“The recent fall in the oil price to around $54, a 19 month low and 30% off last year’s peak in dollar terms, and even more in sterling, will have a beneficial short and medium term impact on the inflation rate and that, combined with today’s rate rise, will be very helpful to the inflation figures, with a return to 2% by mid year looking probable. A third rise in only 5 months is likely to put some borrowers under pressure and make some prospective purchasers have second thought as they worry about further interest rate increases. Thus I expect to see the rate of house price increases slow down markedly over the first half of this year.”

What should borrowers do now?

Boulger continues: “Borrowers who think that Bank Rate will rise above 5.5%, and those who just want or need the security of knowing what their monthly payments will be, still have a few fixed rates to choose from below 5%, but these were already rapidly disappearing, and most of those which are left are likely to be withdrawn very soon. Indeed, several lenders had already pulled or increased their fixed rates this week as a result of 5 – 10 year swap rates increasing by 0.4% in the last month.

“There is a better choice of trackers and 2 year rates without extended early repayment charges start as low as 4.44%, although this rate has a 1.25% fee. Overall there is still an excellent choice of 2 year trackers around 5%, based on the new rates, and 3 and 5 years trackers, including some with both no early repayment charges at any time and a droplock option, at around 5.25%.

“For borrowers who would like some interest rate protection but don’t want to lock into a fixed rate at current levels a capped tracker offers a good compromise, although only a few lenders offer capped rates. The best of the current deals are from Coventry and Marsden Building Societies. See table attached for details.”