Unchanged bank rate set to continue into next year
Ray Boulger of independent mortgage adviser John Charcol comments on the news that the Monetary Policy Committee (MPC) has left Bank Rate unchanged for the 17th consecutive month and is leaving the Quantitative Easing programme unchanged at £200bn.
"Despite the year on year CPI falling 0.5% to 3.2% over the last 2 months, current indications are that it will remain above the 2% target for most of next year. A key influence will be the further increase of 2.5 percentage points in VAT from 4th January next year, which means that the impact of this year's VAT increase will no longer fall out of the year on year calculation. However, on the plus side for inflation the continued weakness of the dollar will mitigate or reverse some cost increases.
"Mervyn King said last week that it may be a "considerable" time before the benchmark interest rate of 0.5% returns to "normal." This also begs the question what is normal? The new normal for the next 5 - 10 years may be very different from the old normal! 5 year swaps traded within a very narrow band over the last month and are marginally lower at 2.45%, just off the all time low point, which provides further confirmation that the market expects Bank Rate to not only remain low for an extended period but also to only rise slowly.
"This week's half yearly bank reporting season also provides evidence that increasing Bank Rate too quickly could have a very negative impact on the economy. All the banks have reported a large improvement in profits but most of this stems from a huge reduction in the bad debt provision. This follows a reduction in arrears and some de-leveraging in both the personal and business sectors, which has only been possible because of the very low Bank Rate. There is still a long way to go in the process of de-leveraging UK plc and this will only be achieved by keeping Bank Rate exceptionally low. Increasing Bank Rate too far, too quickly, could easily reverse the trend of lower bad debts, thus putting bank's balance sheets under more pressure and reducing their ability to lend. Even less lending by the banks will stall the economic recovery and hence the improvement in tax revenues, which the Government is depending on to reduce the deficit to manageable proportions."
What does this mean for mortgages?
"Despite some two year fixed rates now available below 3% a fixed rate for such a sort period offers little value. However, the gap between 5 - 10 year fixed rates and the initial rate payable on a tracker mortgage has narrowed as some tracker margins have increased and fixed rates edge lower. In general, we believe trackers still offer better value, but the best longer term fixed rates are now offering good value for those who want, or need, interest rate security. Anyone on a good long term tracker mortgage with borrowings in excess of £500,000 who wants some interest rate security should consider buying a 5 year cap as an alternative to switching to a fixed rate."