Mortgage News
Cost of borrowing to stay low
The Bank of England Base Rate looks set to remain low for the foreseeable future.
Mervyn King, the Governor of the Bank of England, said today that while inflation currently remains over its target rate of 3%, that figure is likely to fall back to below 2% in 2011 and remain there for a number of years, removing any incentive the Bank might have for hiking the Base Rate.
Bank Base Rate has now stood at 0.5% for 14 months.
Today’s quarterly inflation report reveals that inflation in April stood at 3.4%, a slight increase on the figure of 3.2% recorded in March. Rising inflation was attributed to the return of VAT to 17.5%, the increase in energy prices and the depreciation in Sterling.
The inflation report indicated that some of these factors at least are temporary, and once the resulting spike has passed, inflation is likely to undershoot its 3% target for some time to come, giving the Bank of England little reason to move Base Rate.
Furthermore, the anticipated cuts to public spending to be instigated this year by the new government are expected to effectively replicate the effect of a rise in interest rates by reducing spending in the economy.
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“The stronger the measures that are taken to reduce the fiscal deficit, the longer Base Rate will remain low, as they will have broadly the same impact as an interest rate rise,” said Ray Boulger, senior technical manager at John Charcol.
The news that interest rates are likely to remain low will be welcomed by mortgage borrowers on tracker rates, which have been by far the most popular products during the downturn.
Boulger also pointed out that mortgage lenders currently have scope to reduce the cost of their fixed rate mortgage deals, should they have the appetite to do so.
“Over the last month, gilt yields have dropped by around 20 basis points, and swap rates (which roughly dictate the cost of fixed rate funding) has come down accordingly,” he explained.
“Yet very few lenders have cut the cost of their fixed deals in recent weeks. That means most lenders now have room to cut fixed rates if they so choose.”