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Inflation drop could be good news for mortgage advisers

by: Emma Lunn
  • 17/10/2014
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With inflation at its lowest level since September 2009, and possibly set to fall further, the Bank of England is now under less pressure than previously to raise rates to curb prices.

But what does a delayed rate rise mean for the mortgage market?

Consumer Price Index (CPI) inflation fell from 1.5% in August to 1.2% in September, well below the dip to 1.4% which was expected. The fall in Retail Price Index (RPI) inflation was less, dropping from 2.4% to 2.3%.

This latest drop in CPI inflation has a big impact on interest rate predictions and, perhaps obviously, the mortgage market. The past few months have seen increasingly stark warnings about the impact of a rate rise. For example, the Building Societies Association warned that more than a quarter of borrowers would face difficulties when rates rise.

But does falling inflation mean a rate hike is no longer imminent? Plenty of pundits seem to think so.

Just this morning, Bank of England chief economist Andrew Haldane said the outlook had changed substantially in the last three months.

“That reflects the mark-down in global growth, heightened geopolitical and financial risks and the weak pipeline of inflationary pressures from wages internally and commodity prices externally,” he said.

“Taken together, this implies interest rates could remain lower for longer, certainly than I had expected three months ago, without endangering the inflation target.”

Chris Williams, CEO of Wealth Horizon, described the ongoing fall in inflation as “prompting a stay of execution” for borrowers, while IHS Global Insight economist Howard Archer revised his expectation of the first rate hike from February to May 2015.

“I would not completely rule out a rate hike in February if growth remains robust and particularly if the early 2015 pay settlements see a marked increase,” said Archer.

Archer said with the possibility of a further drop in CPI inflation as oil prices continue to weaken and with global growth concerns, particularly in the Eurozone, posing an increased downside risk to the UK growth outlook, the majority of Bank of England MPC members will err on the side of caution in raising interest rates.

Research by Moneyfacts showed that we’re now seeing competition heat up again in the mortgage market with lenders reducing their rates. The data analyst firm said this is a “significant reversal” from a few months ago when mortgage rates were rising in anticipation of a future base rate rise.

“The reason lenders are cutting rates so dramatically is in part due to preparation, by gaining new customers now they are hoping to recoup any losses that will occur when base rate rises and customers currently sitting on low SVRs remortgage elsewhere,” said Charlotte Nelson of Moneyfacts.

Turmoil in the stock market is another factor that could lead to cheaper mortgage rates. The sell-off in equities this week means more money piling into government bonds, pushing yields down.

Ray Boulger of broker John Charcol said falling gilt yields has been reflected in swap rates, a key factor in lenders’ cost of funds when pricing fixed rates mortgages.

“Only a few lenders have announced cuts to the cost of their fixed rates this week but as a result of not only today’s massive fall in the cost of funds, but also the cumulative effect of recent falls, all lenders have a lot of catching up to do in their fixed rate pricing,” he said.

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