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Brokers anticipate potential BoE rate cut in event of no-deal Brexit – analysis

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  • 20/08/2019
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Brokers anticipate potential BoE rate cut in event of no-deal Brexit – analysis
Mortgage brokers don't expect predictions of a potential interest rate rise in the event of a no-deal Brexit to come true, whereas lenders prove tight-lipped over their planning for the possible outcome of a European exit.

 

The potential for a Bank of England (BoE) rate rise was mooted last week by former head of the civil service Lord Kerslake. He predicted it could happen if the pound hit parity with the dollar in a no-deal situation. 

However, brokers were not convinced that a rate rise was particularly likely. 

Greg Cunnington, director of lender relationships at brokers Alexander Hall, said: “Lord Kerslake has indicated interest rates may increase if sterling falls and obviously this would potentially lead to mortgage rates rising.

“However we can see with swap rates decreasing in recent months, and with lenders beginning to drop mortgage rates on the back of this, notably Barclays last week, the markets also seem to be thinking interest rates could, in fact, decrease on the back of a potential no-deal Brexit. 

 “We are seeing clients asking more about two-year products again, on the back of five-year rates being increasingly popular in the last couple of years as the rate differential between the two has lowered.

“Clients are understandably keen to discuss the potential implication this could have. The reality is that mortgage rates are currently very low, and clients remain in a very strong position from a mortgage perspective.

 

Recession rate cut

Richard Hayes, chief executive, Mojo Mortgages, shared a similar view. “If we’re talking about no-deal Brexit, the reality is that we’re talking about the potential for a recession.

“There are predictions that say the BoE will increase rates and predictions that say it will decrease rates. The only real precedent we have is the most recent recession and it reduced rates to guard against a slowdown in inflation and lack of consumer spending.

“From our perspective, if you see those two traits again, it would be unusual for the BoE to do something different from what it did only a few years ago.

“We have been saying to customers that rates are exceptionally competitive and now’s a good time to fix for either two or five years, depending on your individual circumstances.

 “We have definitely seen an increase in customers opting for five year fixed, but there is still a decent chunk of customers buying two years as well, confident that rates might come down in the future,” he said.

Hayes added that lenders’ books of business are now more resilient compared to where they were in 2007 before the credit crunch.

“There has been a more prudent approach to affordability post credit crunch and post the Mortgage Market Review. From an affordability and stress-testing perspective, lenders have been doing a good job of adhering to the rules set out.

“There have been significant changes which mean that lenders going into a potential recession are less concerned, because lending practices are now more appropriate for the times,” Hayes said.

 

Tight-lipped lenders

The big lenders were unanimously unwilling to discuss their planning for a potential no-deal Brexit.

Asked what steps they were taking, including in anticipation of a possible rate rise, none of the major lenders was prepared to comment.

Barclays said: “Unfortunately our economists are not available to comment on this topic.”

Lloyds responded: “As you’d expect, this isn’t one we’d be able to give you our thoughts on.”

HSBC stated: “I’m sorry, we don’t have anyone available so are not going to be able to help you on this occasion.”

Nationwide and Royal Bank of Scotland did not reply to requests for comment.

The list of “no comments” was offset to a degree by the lender association UK Finance, which said: “The financial resilience of the banking and finance sector is high and it is well prepared to be able to absorb the cost of any negative economic impact resulting from a disorderly exit.”

Last week’s article by Business Insider quoted Kerslake saying that “the normal response, if you face a run on a currency, is to raise interest rates”.  

The pound has dropped by 4.7 per cent against the dollar in the past three months, to $1.21 on 19 August down from $1.27 on 19 May.

The new Prime Minister Boris Johnson has pledged that the UK will exit the European Union on 31 October with or without a deal.

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