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And the base rate wait goes on – Howes

by: Richard Howes, director of mortgages at Paradigm Mortgage Services
  • 05/06/2024
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And the base rate wait goes on – Howes
As we all know, on 9 May, the Bank of England’s Monetary Policy Committee (MPC) announced it had left interest rates unchanged at 5.25% for the sixth meeting in a row.

This follows 14 consecutive meetings where rates were increased from 0.1% in December 2021 to 5.25% in August 2023. 

The nine-member MPC vote in May was seven in favour of unchanged rates and two in favour of cutting rates by 25 basis points, so you could argue those who want change are making progress, given there was only one vote for a rise the month before. 

The MPC said while key indicators of inflation persistence remain elevated, they are moderating, and as a result, the financial markets expect the MPC to cut rates later this year. 

Such news seems worlds away from the bumper months of January and February of this year, when lenders priced hard for business, and advisers and consumers responded – based on the predictions rates would be cut potentially up to four times this year. 

 

The waiting game 

We are now left with the crumbs of comfort that there could be a rate cut in June – with traders placing a 50% chance of the first rate cut happening then rather than in August – with one more rate cut expected by the end of the year, possibly as late as December. 

Obviously, this would provide some relief for mortgage holders, who have seen mortgage rates fluctuate in recent months as expectations of base rate cuts have shifted.

The House of Commons Library research predicted 868,000 households will face a mortgage increase between now and a potential November election. The average two-year fixed-rate deal is now 5.91% and the average five-year deal is 5.48%, according to Moneyfacts. 

A number of lenders have adjusted their mortgage rates in recent weeks, whether that is because they are ahead of plan – and by pricing up, they can increase their margin – or because they do not wish to compete in this rate environment. 

 

The levers behind base rate changes 

But, what can we expect the trajectory for rates to be in the not-too-distant future? 

There are nine considered areas that influence the bank base rate, including the well-trodden path of inflation, monetary policy objectives, unemployment, economic conditions and market expectations, to name but a few. 

Swap rates, which take their guide from a number of macroeconomic factors, including but not limited to inflation and the base rate, have started to dip, suggesting markets are pricing in a cut in the near future.

The MPC has started to reduce the size of its quantitative easing (QE) programme from its recent peak value of £895bn to £703bn on 1 May 2024, which is significant when looking at and trying to predict future rates.

It is doing this by letting some of the government bonds it holds mature and by actively selling some of the bonds it holds to the market.

QE consists of the bank creating new money electronically (as central bank reserves) and then using it to purchase financial assets, mostly government bonds.

As I am sure you know, bond prices work in inverse proportion to swaps. When bonds are strong, swap rates tend to go down, which is what we are seeing now, when one then factors in the commercial mechanisms of banks around savings rates versus mortgage demand, margin, and risk, the hope is Q3 will see pricing in lending be more competitive and not as high as currently. 

This is great, but makes the adviser’s job harder when advising clients, particularly if clients are not sure whether to act now or wait. The good news, though, is once again the broker has never been more important in the client relationship given this uncertainty and potential for a rate drop. 

We all know rates will come down, after all, what goes up… and so on, however, the trick is watching all the areas of influence to be able to give a rounded view and act accordingly.

The results of the next scheduled MPC meeting will be announced on 20 June. The entire market will be watching this with great interest. 

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