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The impact of a Bank Base Rate cut on mortgage pricing – Marketwatch

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  • 19/02/2015
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The impact of a Bank Base Rate cut on mortgage pricing – Marketwatch
As inflation falls further away from the Bank of England's 2% target, tumbling to 0.3% in January, the suggestion of a cut to the long-standing 0.5% Bank Base Rate (BBR) position was mooted by Mark Carney.

Presenting the Inflation Report on 12 February, Carney said the Bank ‘has the will, means and responsibility’ to cut the BBR to zero and introduce further quantiative easing if necessary.

This week our experts consider what impact a further base rate cut would have on the mortgage industry.

Mike Jones, director of intermediaries at Halifax, looks at the possibility of a rise in mortgage rates should the BBR fall further.

Robert Wood, chief UK econmist for Berenberg Bank, considers the impact of a negative interest rate and deflation on the mortgage and housing markets.

Fionnuala Earley, residential research director at Hamptons International, believes irrespective of a further cut in the base rate, rates are probably as low as they can go.

Mike Jones is director of intermediaries at Halifax

It’s important to note that the February Inflation Report stressed the transitory nature of the factors driving inflation below target. Current growth projections and stronger inflationary prospects in the later years of the MPC’s forecast support the expectation for a first interest rate rise towards the end of 2015, though uncertainty around the timing remains high.

The Bank of England also clarified how it may react if the economy was to weaken in future. Until this most recent commentary many of us believed the lower boundary for interest rates was 0.5% and the next direction for interest rates would be up, but Mark Carney outlined that if necessary the Bank could cut rates further.

Coupled with the increase in competition and record low mortgage rates, the potential for a 0.25% or even 0% base rate could mean that there has never been a better time for borrowers. Borrowers currently on a standard variable rate could find substantial savings available by remortgaging, as well as the chance to fix a rate over the longer term and protect against rate rises in the future.

However, there is also the possibility that the interest swaps market would react to a drop in the base rate by worrying about the need for a rise beyond current expectations longer term. As these markets have a big influence on mortgage pricing it is therefore entirely possible that fixed mortgage rates would rise, not fall.

The inflationary factors driving this debate could be temporary. If so, it is likely that we will see them fall out of CPI at the start of next year.

Robert Wood is chief UK economist for Berenberg Bank

A rate cut, if it happened, would mean cheaper mortgages as banks passed the cheaper base rate through to borrowers. The issue would be more complicated if the Bank cut interest rates into negative territory, with banks potentially pushing up mortgage rates to compensate for the losses they would incur on their cash parked at the Bank of England. But the UK remains a long way from either a rate cut or the negative central bank interest rates seen in the eurozone.

The most likely next move from British rate setters remains an interest rate hike, not a cut. Falling petrol prices have dragged inflation well below the Bank’s target but are good news for households. By leaving consumers with more money in their pockets, cheaper petrol will boost spending elsewhere in the economy, raising growth, cutting unemployment and speeding the return to more normal inflation and interest rates.

If the UK did get stuck in a deflationary mindset, which Mark Carney was trying to reassure people the Bank could prevent, then the important issue for housing would not be the precise interest rate setting. Rather, house prices would be stuck in the deflationary trap too. Fortunately, there is only a small risk of that. Mark Carney’s reassuring words should, in fact, have made it less likely.

Fionnuala Earley is residential research director at Hamptons International

It’s good to hear that the governor wants to add as much monetary stimulus to the economy if deflation becomes a reality in the UK. Low rates not only mean that it’s cheaper to borrow, but they also mean that there is a bigger incentive for consumers and businesses to spend their money. More consumption and investment will stimulate economic growth and help to get things back on track.

But, it’s not clear that a cut in the Bank Base Rate (BBR) would make a tremendous difference to mortgage pricing. Already forward rates in the money markets are falling on the expectation that the BBR will be lower for longer. This, along with larger risk and market share appetites of lenders, means that mortgage rates, particularly fixed rates, have been pared right back even without a reduction in the Base Rate. Savings rates too have fallen over time and savings providers have increasingly looked to time limited products to raise new funds.

The cost of funding inevitably affects how low mortgage rates can go because lenders have to have regard their margins, members and shareholders. There may be some opportunity to raise more wholesale funds at a lower cost but mutuals may be limited in this area because of regulation. More likely we should not expect to see a very big difference in mortgage pricing. Indeed with rates already at historic low levels, it’s not clear that a further cut in rates would unlock more demand, especially given the affordability tests that lenders are now required to perform.

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