Prior to 11 September, the UK economy has continued to grow at a reasonably healthy rate. It had not seen the sharp slowdown encountered in the US. Here, GDP growth has declined modestly from 2.4% at the end of last year to around 2.2%.
In contrast, the US economy is apparently slipping into recession after 2% growth at the end of 2000. Most forecasters had regarded this year as the trough in the economic cycle, before a recovery ensued during 2002.
This view has now altered. It appears that weakening consumer confidence risks a more prolonged slowdown. Any recovery in the UK may be later next year and potentially weaker.
At the time of going to press, base rates had already fallen by 1.5% ‘ to 4.25% ‘ since the start of the year and are set to fall again before the end of the year. Most lenders have cut their standard rates by 1.4%. Current consensus among economists is that rates will be pushing back towards 5%.
Fixed rate pricing is a strange animal and depends on financial markets’ forecasts of future base rates. Markets have been revising their expectations for base rates and as a result, lenders have been reducing rates on fixed deals. The key question is whether the economy will recover next year, dragging base rates higher. If so, then fixed rates may prove to be good value. However, economic conditions could deteriorate and the current uncertain climate makes this difficult to rule out.
The choice to take a fixed rate will depend on borrowers’ appetites for payment volatility during the course of their mortgage. Those who want to budget carefully will find fixed rates a helpful tool. The best approach is to recommend a deal the borrower can clearly afford over the medium term, that will not require an uplift in payments at a later date.