Will Bank Rate fall next month?

“The minutes of today’s meeting will be particularly eagerly awaited, for a clue to next month’s decision” says Ray Boulger of leading independent mortgage adviser, John Charcol. “This is the first time for a long while that an MPC meeting has been held with the 2 year swap rate, currently 5.7%, below Bank Rate. In normal times one would also expect 3 month Libor, currently 6.26%, to be below Bank Rate when the next move in Bank Rate is expected to be down. However, these are not normal times and the swap market is currently a better indicator of where the market expects Bank Rate to go than Libor.

“Failing to cut Bank Rate today was a missed opportunity to help redress some of the problems made worse by The Bank’s handling of the Northern Rock situation. With 3 month Libor having been as high as 6.9% since the last MPC meeting, and still 0.5% above the Bank’s reference rate, monetary policy has been much tighter over the last month than the Bank thought necessary to control inflation. A 0.25% cut would have brought 3 month Libor down to around 6%, a level the Bank thought adequate for the market peak but now too high in view of the damage done to the economy by the credit crunch.

“The further fall to 1.8% in the CPI for August is additional justification for a rate cut, as is the slowing housing market. Activity in this market has fallen sharply over the last couple of months with fewer sellers as well as less buyers. Looking at the year on year growth in house prices is misleading. What is important is what is happening now, not what happened at the end of last year.”

House prices – the real picture

“An analysis of the real figures from Nationwide shows a significantly different picture to the publicised seasonally adjusted ones. The real monthly changes for the last 3 months are + 0.1%, - 0.2% and finally for September + 0.4%, producing a real increase over the last 3 months of just 0.4%, compared with + 3.9% for the 3 months to June. The seasonally adjusted, or doctored, figures for the last 3 months were + 0.1%, + 0.6% and, for September, + 0.7%, producing an increase over the last 3 months of 1.4%, compared with 2.5% for the 3 months to June.

“Thus, in the real world, the Nationwide figures for the last 3 months show house prices increasing at an annualised rate of only 1.6%, compared with 15.6% only 3 months ago! Furthermore the US housing market is still deteriorating, as are the housing markets in some Eurozone countries, including Ireland and Spain. We will not escape some negative impact from the economic downturn other countries will suffer from falling house prices.”

So what should borrowers do now Ray?

“There has been some tightening of criteria in the mainstream market over the last month, but only on the high LTV mortgages, although several lenders have reduced the number of mortgages in their product range. Some lenders, notably HBOS Group companies, have increased their Buy to Let rates substantially and some have also done this for self cert mortgages. However, it is the sub prime market that is talking the biggest hit, with rates going up substantially and a severe tightening of criteria, such as maximum LTVs being reduced to 75%. The heavier the adverse credit allowed, the greater the impact.

“Despite further falls in the cost of fixed rate mortgages over the last month, 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, although with little difference now between the best fixed rates and the best trackers some borrowers will prefer to opt for the safety of a fixed rate.”