So when will base rate start to fall?

Ray Boulger of independent mortgage adviser, John Charcol, says: “Today’s decision by the MPC to leave Bank Rate unchanged at 5.75% was regarded as a foregone conclusion by the market.

“However, the minutes of the meeting, due out on 18th October, will be awaited with far more than the usual interest in the hope of getting a better insight into the Bank’s latest thinking on the credit crunch. I expect the MPC will have discussed the possible need to cut Bank Rate sooner than previously expected as a policy response to the credit crunch and their thoughts on this will be particularly interesting.

“The MPC are far less transparent than the Fed or the ECB in communicating their thinking on the short term trend in Bank Rate. However, despite the strong indication from last month’s quarterly inflation report that Bank Rate would need to rise to 6%, the subsequently announced fall to an annual rate of 1.9% in the Consumer Price Index (CPI) was clearly as big a surprise to the MPC as to everyone else.

“Despite the probability that the CPI will creep back over 2%, the lower than expected current figure is only one of the factors determining a change in course of Bank Rate. Another, and even more important one, is the credit crunch. The current spread of over 1% between Bank Rate and 3 month Libor, which is unprecedented in living memory except for very short periods, is clearly unsustainable for any extended period if the credit markets are to function efficiently. Increasing Bank Rate in this environment would send out all the wrong signals.

“The fact that it looks increasingly likely that 5.75% will prove to be the peak for this interest rate cycle has allowed swap rates to fall sufficiently for many lenders to reduce their fixed rates over the last few weeks. However, if the current Bank Rate – Libor spread prevails for much longer, we may see some lenders increasing the cost of their Bank Rate tracker mortgages, and mortgages offering a discount off their standard variable rate, to reflect the increased funding cost in the wholesale money markets.”

So what should borrowers do now Ray?

“So far we have seen very little evidence of UK lenders tightening criteria in the mainstream, buy to let or self cert markets, but lenders can change their credit score hurdle points without making an announcement and so criteria changes can be made surreptitiously.

“Despite the recent falls in the cost of fixed rate mortgages, the more it appears that we are at the top of the interest rate cycle, the less reason there is to buy a fixed rate. Therefore trackers still offer better value for those borrowers who don’t need the certainly a fixed rate provides. The best trackers currently available include Halifax’s remortgage only 2 year tracker at 0.36% under Bank Rate with a £1,499 fee, but also with a free valuation and free legals, and John Charcol’s lifetime tracker at 0.17% above Bank Rate for LTVs up to 80% and 0.28% above Bank Rate up to 95% LTV with no Higher Lending Charge. These deals are all flexible and the two lifetime deals both come with no arrangement fee or early repayment charge and on remortgages a free valuation and free legals.”