MPC has little room to manoeuvre this month

Ray Boulger of John Charcol, the UK's leading independent mortgage adviser commented, "Today's no change decision by the MPC was widely expected. However with the economic news from nearly all sectors of the economy getting worse by the day, a rate cut is badly needed to help restore some confidence to consumers and reduce the financial pressure on both them and industry. Last month's letter from The Governor to the Chancellor, and his reply, explaining why the Bank had failed to meet its inflation target, was encouraging. It made it clear that the MPC was prepared to take the medium to long term view on the impact the severe downturn in the economy will have on inflation and will not be panicked into increasing Bank Rate just because of the current spike in inflation, which it is powerless to stop.

"With the consumer price index now expected to hit 4% in the second half of this year, it is difficult for the MPC to cut Bank Rate, but the rapidly declining economic situation means a rise would cause more problems than it solves. With economists increasingly speculating on the possibility of a recession next year, a Government under pressure on nearly every front and the deadline for an election less than 2 years away, there will be no pressure from The Government for a rate increase to combat inflation.

"With a new member of the MPC this month attention will be focused on whether he appears to be a hawk or a dove. The minutes of this month's meeting may give a hint as to how long we will have to wait for the next rate cut and, on the assumption that David Blanchflower will have again this month voted for a cut, it will be of particular interest to see if any of his colleagues shift their position and increase the ‘cut' vote."

What should borrowers do now Ray?

"On the back of the market reassessing its view since last month on where Bank Rate is heading, 2 year swap rates have fallen by a little over 0.5% from last month's 6.5% peak and 3 month Libor has fallen 0.1% to 5.85%. Some lenders have reduced their fixed rates to partially reflect the lower swap rates and even some tracker rates have been cut. For borrowers who want or need the security of a fixed rate mortgage, playing a waiting game should offer the opportunity to fix at rates lower than those available today. However, current rates on the best tracker mortgages are around 0.5% lower than the best fixes and so unless Bank Rate averages more than 5.5% over the deal period, fixed rates will end up costing more. In fact with Bank Rate likely to fall further, the gap between current fixed rates and a tracker mortgage is likely to widen, making trackers the current mortgage of choice for borrowers taking a view on interest rates."