Bank rate held when the market badly needed a cut

Ray Boulger of leading independent mortgage adviser, John Charcol, says “The minutes of last month’s MPC meeting spelt out that the committee had seriously considered cutting Bank Rate, although the eventual vote was not close at 8 – 1. Since then there has been a steady progression of negative news, particularly over the last week, on the widening impact of the US sub prime mortgage debacle.

“2 year swap rates have fallen further over the last month and are now 0.1% below Bank rate at 5.65%, thus anticipating a Bank Rate cut soon.

“Today’s no change fails to look beyond the probable short-term increase in the CPI back above the target level of 2%, to the dangers the global economy faces. This is in the light of the increasingly worrying news which continues with relentless regularity to seep out from the banking community of ever more losses on their sub prime mortgage lending.

“It also ignores the fact that because 3 months Libor has been at least 0.5% above the official rate for the last 3 months, combined with the serious lack of liquidity in the market, policy has been much tighter than the Bank of England thought necessary at the time of the last Quarterly Inflation Report in August. A cut of 0.25% today would at least have pushed 3 month Libor back down to about 6%. It would also have started to redress the Bank of England’s policy mistakes, as outlined in last month’s Financial Stability Report, in dealing with the credit crunch.

“The problems in the credit markets continue to go from very bad to even worse as increasingly dire news emanating from the sub prime mortgage mess continues to surface. Only yesterday the shares of Washington Mutual Inc., the largest U.S. savings and loan company, fell 17% (their largest one day fall since the 1987 market crash) after New York Attorney General Andrew Cuomo said he had found a “pattern of collusion” in mortgage valuations linked to the company. Concerns were heightened further as he subpoenaed Fannie Mae and Freddie Mac, the two largest U.S. providers of mortgage financing, as part of his investigation. The suggestion of such large scale fraud in a major mortgage lender is a serious concern.

“To cap all these problems a potentially very worrying development yesterday was the report by RBS’s chief London credit strategist, Bob Janjuah, that when new rules from The Financial Accounting Standards Board come into force in a week’s time it will be harder for companies to avoid putting market prices on securities considered hardest to value, which are known as Level 3 assets. This is likely to lead to significantly more Balance Sheet damage for many banks.

“These are all good reasons why the MPC should have cut today. Their failure to do so means that today’s opportunity to mitigate the potentially serious problems building up in the banking system has been lost.”

So what should borrowers do now Ray?

“Despite several lenders reducing the number of mortgages in their product range over the last few months there is still a good choice available for most borrowers on attractive terms. However, in the sub prime market there has been further criteria tightening and rate increases, although not on the same scale as in the previous month. It is still true that the heavier the adverse credit a borrower has ,the more they have been hit.

“The cost of fixed rate mortgages is likely to fall further when the market fully discounts the rate cut we are likely to get in the not too distant future and starts looking ahead to the next one. For the time being trackers offer better value for those borrowers who don’t need the certainly a fixed rate provides.”