Mortgage Vision: ‘Don’t expect the base rate to go up any time soon’ – Moloney
Speaking at the Mortgage Vision event about the post-pandemic economy, Moloney said not to expect the base rate to go up “any time soon”.
He said in 2018, experts predicted rates to remain relatively low in 2020 at around 1.5 per cent but said the Bank of England had also pushed rates up to allow some cushioning in case of a rough Brexit.
However, Moloney added this went out of the window with the coronavirus pandemic.
Moloney pointed out that the low rate environment went across the mortgage market as despite being hedged against swap rates, fixed rates were also low and mortgages had “never been as cheap as they are today”.
Active housing market
Along with low rates and cheaper mortgages, the stamp duty holiday has “propelled” activity in the housing market which continues to be buoyant, Moloney said.
He added: “The average house price in the UK is worth £30,000 more than it was going into the lockdown.
“Which tells you this market is still moving, still bubbling and the stimulus of the stamp duty holiday has had the desired effect.”
Lenders working to ‘rebuild margins’ as bank rate held at 0.1 per cent
The historically low bank rate has “pushed down” on new mortgage rates, the Bank of England said.
It was suggested that the heightened risk to borrower credit and a recent increase in wholesale funding costs had affected the pricing of mortgages, leading banks to rebuild margins by raising rates on higher loan to value (LTV) deals as there was less lender competition in that space due to the effects of the pandemic.
The committee noted that while the 0.1 per cent rate had been passed on in full to most tracker and standard variable products, rates on new fixed mortgages at low LTVs remained flat and higher LTV mortgages had seen rate increases.
However, the committee claimed that without cutting the base rate to its historically low level, it was possible rates would have risen in all loan to value ratios.
It said: “It was likely that the reductions in bank rate and reference rates had pushed down on new mortgage rates.”
The MPC was not expected to adjust monetary policy at this meeting.
Negative rates ‘in the toolbox’
Speaking to journalists after the committee’s decision was published, BoE governor Andrew Bailey said negative interest rates were part of the bank’s toolbox but added, “at the moment we do not have a plan to use them”.
The economy will recover slower than expected but GDP will not contract by 14 per cent as the committee initially predicted, but rather nine per cent.
It was forecast that GDP would continue to recover in the near term, growing by nine per cent in 2021 and 3.5 per cent in 2022, but not exceed its pre-Covid level until the end of 2021.
Bank staff estimated that UK-weighted world GDP had fallen by nine per cent in Q2, larger than any quarterly fall recorded during the global financial crisis and 12 per cent lower than its pre-Covid level in 2019 Q4.
Unemployment was also predicted to rise to 7.5 per cent by the end of the year as support schemes wind down.
The committee also voted to maintain quantitative easing at £745bn.
Positive economic data gives ‘room to delay’ base rate cut – Santander
An unexpected fall in inflation in January as well as comments made by three members of the BoE’s Monetary Policy Committee fuelled speculation that the next base rate move would likely be a reduction, with Jonathan Haskell and Michael Saunders voting for a cut consistently since November.
Saunders said the UK’s continued “sluggish” economic growth was one of the deciding factors towards a cut, however the recent PMI results suggest this may no longer be the case.
Frances Haque, Santander UK chief economist, said: “The January flash PMIs were stronger than expected with increases across manufacturing and services pushing them back into growth territory.
“Along with the positive labour market data released earlier this week and the more buoyant survey data from RICS, Deloitte and CBI, this will give the MPC members room to delay a cut until further data is released for the beginning of the year.”
Andy Scott, associate director at JCRA, added: “UK economic data this week has shown a better than expected recovery following the outcome of last month’s election, making a rate cut next week less likely.
He also said the data pointed to a “significant pick up” in UK business optimism and consumer confidence following the Conservative election win.
“We expect this is likely to mean that the Bank of England keeps rates on hold next week, preferring to wait and see whether the economy is starting to reverse the weakening growth trend,” he said.
Economic factors pointing to rate hold
Peter Izard, business development manager at Investec, said: “The latest PMI data along with the other forecast this week from the International Monetary Fund now leads to a less likely base rate cut.
“All the recent economic factors point to a positive trajectory for the economy and the Bank of England may wish to take a hold and wait stance in the months to come before making its next choice.”
The flash IHS Markit/CIPS composite PMI data suggested the growth seen in January was driven by a “sharp increase” in new work within the service sector as its business activity index rose to 52.9, up from 50.0 in December.
Furthermore, manufacturing output was at an eight-month high of 49.8, up from last month’s 47.5.
The report said reduced political uncertainty following the general election had a “positive impact” on business and consumer spending decisions at the start of the year.
Markets expect further rate cut in 2020, potentially as early as January – Maddox
However, division remains between the members of the MPC with two members voting for a rate cut again this month – these same two policymakers voted for a rate cut at the previous meeting.
The MPC reiterates it “could respond in either direction to changes in the economic outlook in order to ensure a sustainable return of inflation to the two per cent target”.
The committee highlighted that uncertainty around Brexit may remain despite Boris Johnson’s election win guaranteeing the UK’s departure from the EU by 31 January, and in spite of his latest talks indicating a higher chance of a lighter exit deal than discussed with the EU before the elections.
The market remains cautious, estimating an 80 per cent probability of a rate cut by December 2020, with numerous banks forecasting a rate cut as early as January 2020.
Therefore, the upcoming UK economic data will take on even more importance to give clarity on the MPC’s rate direction.
The committee continued to monitor developments in the next stages of the Brexit process including UK’s future trading relationship with the EU and the recovery of global growth.
It has noted that if either global growth fails to stabilise, or Brexit uncertainty remains “entrenched”, then this will result in measures being undertaken via monetary policy.
In the scenario where the economy recovers in line with the MPC’s projections, then it is probable that policy will be tightened gradually.
The UK economy continued to stagnate over the August-October period as political uncertainty hit growth and global growth slowed down.
The committee reduced its Q4 projections to 0.1 per cent in the latest report, as a result of weakness in construction output during October 2019, and decreased business investment due to the general election.
The minutes indicate an inflation rate of 1.25 per cent in spring 2020, falling below the target rate of 2 per cent.
On a positive note, the MPC highlighted that household consumption increased by 0.4 per cent in Q3 2019, with retail volumes increasing at 0.2 per cent in the three months to October 2019.
It noted that most indicators were consistent, with a small rise in house prices in Q4. In addition, UK employment figures remained at record highs, signalling confidence in the job market.
Rate cuts in New Year
The markets still forecast the BoE base rate to be cut to 0.5 per cent in six months.
Other forecasted rates were unchanged, with the three-month LIBOR, two-year swap rate, three-year swap rate and five-year swap rates expected to remain at 75 bps for the next three years.
The ten-year swap rates are expected to stay at one per cent.
And Sterling has also wiped out all the gains made during the Conservative Party win on 12 December.
Base rate held but vote still split
Members Jonathan Haskel and Michael Saunders were the two who went against the vote, both proposing a cut to 0.5 per cent and is the second month in a row they have voted to lower the rate to 0.5 per cent.
This falls in line with comments Saunders made in September where he suggested that in the event the UK avoids a no-deal Brexit, the next base rate move would be down instead of up.
Monetary policy still uncertain
The BoE maintained its stance on which direction monetary policy could go in despite the Conservatives election victory.
The central bank noted it “could respond in either direction to changes in the economic outlook in order to ensure a sustainable return of inflation to the two per cent target”.
The committee said it would monitor how businesses and households responded to Brexit developments in order determine its next move.
Frances Haque, Santander UK chief economist, said: “The decision to hold rates was widely expected given the outcome of the general election increases the certainty of the UK leaving the EU at the end of January, reducing the risk of a continuing ‘slow puncture’ in the UK economy.
“The economic data published so far for the last quarter of this year indicates that growth will likely be weak or perhaps even negative and continues to depend on consumer spending to fuel growth.
She added: “However, with inflation well below the target rate and with the likelihood of reduced uncertainty, at least in the short term, the MPC is clearly standing by its cautious approach and will wait to see what type of momentum is carried into the beginning of 2020.”
Aspen targets doubling of loan book following rate cut
The lender put the growth witnessed in its “record summer and autumn periods” down to its cut in interest rate introduced in July.
As a result it will continue to offer a starting interest rate of 0.45 per cent on products of up to 80 per cent loan to value.
Aspen said the 0.45 per cent rate will remain available across all its first and second charge unregulated residential and commercial products regardless of loan to value (LTV), loan term, property type and loan purpose.
Jack Coombs (pictured), director at Aspen Bridging, said: “Since the summer the market has remained very aggressive, and to maintain our pipeline of business we need to continue to lead from the front.”
He also criticised other lenders for “using a low interest rate to ‘open the door’ to an applicant before increasing the figure during the process.”
Next base rate move could be down rather than up – BoE’s Saunders
Speaking to local businesses in Barnsley today, Saunders, who is a member of the BoE’s Monetary Policy Committee (MPC), said: “If the UK avoids a no-deal Brexit, monetary policy also could go either way and I think it is quite plausible that the next move in Bank Rate would be down rather than up.”
Saunders’ comments are the first clear indication that the committee would favour a further cut.
The external governor’s comments are a change from the MPC’s previous stance where it said in the event of a no-deal Brexit its response could go either up or down, and this would depend on the effects on supply, demand and the exchange rate.
He said even if the UK escaped a no-deal scenario, uncertainty had acted as a “slow puncture” to the economy which had seen growth “slowed to a mere crawl”.
“In this case, it might well be appropriate to maintain a highly accommodative monetary policy stance for an extended period and perhaps to loosen policy at some stage, especially if global growth remains disappointing.”
Saunders added: “An approach of deferring any change in interest rates until it is clear which Brexit scenario is unfolding may mean that we drift away from the appropriate policy stance and subsequently need to adjust rates rather abruptly.
“In general, I would prefer to be nimble, adjusting policy if it appears necessary to keep the economy on track, and accepting that it may be necessary to change course if the outlook changes significantly.”
Last week, the BoE said interest rates were likely to remain low for a while as it announced it would be holding the base rate at 0.75 per cent.
Artur Baluszynski, head of research at financial consultant Henderson Rowe, said: “Even if we avoid a no-deal Brexit, the last three years have done enough damage to the UK economy to warrant a ‘lower for longer’ approach to interest rates.
“With a short average fixed-term period on their mortgages, UK households are very sensitive to any hikes in interest rates so unless we experience a currency crisis, the Bank of England should continue to keep the ‘cost of money’ reasonably low.”
BoE expects interest rates to stay low for longer
This follows the announcement from the Office of National Statistics which showed that inflation fell to 1.7 per cent in August, down from July’s 2.1 per cent – its lowest level since 2016.
Inflation is expected to remain below the two percent target for the rest of the year.
In its last meeting before the UK is set to leave the EU on 31 October, the MPC said as long as there was ongoing political uncertainty, “domestically generated inflationary pressures would be reduced”, resulting in continued low interest rates.
It said: “In the event of a no-deal Brexit, the exchange rate would probably fall, Consumer Prices Index (CPI) inflation rise and GDP growth slow.
“The committee’s interest rate decisions would need to balance the upward pressure on inflation, from the likely fall in sterling and any reduction in supply capacity, with the downward pressure from any reduction in demand.”
However, it added that in the event of a “smooth Brexit”, interest rates would increase “at a gradual pace and to a limited extent” to return inflation to its target.
Frances Haque, Santander UK chief economist, said: “The decision to hold rates was widely expected, given the outcome of Brexit is still hanging in the air.
“Although the economic data published so far for the third quarter of this year suggests that a recession should be avoided, many of the fundamentals of growth such as business investment and productivity remain weak, with the MPC clearly sticking to its cautious approach.
“Until there’s more clarity on the final Brexit outcome, it’s unlikely we’ll see a change in rates this year.”
Brokers anticipate potential BoE rate cut in event of no-deal Brexit – analysis
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.
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.
Five-year mortgage rates hit lowest level in 2019 as longer swaps slide
The falls have come as swap rates for longer terms are now less than for two years, and perhaps signal that further falls in mortgage interest rates could come.
Data from financial market data service Ice, which monitors the swap markets for lending rates between banks, revealed the unusual reversal in lending rates.
At the close of business yesterday, two-year swap rates were at 0.664, compared to 0.624 for three years, 0.607 for four years and 0.596 for five years.
Perhaps more surprising is that 10-year lending rates were also cheaper than their two-year counterparts at 0.627.
This continued softening of swap rates may also explain why more longer-term mortgages of 10 or even 15 years are being launched.
Mortgage rates down
Moneyfacts revealed that this slide in swap rates had been reflected by falls in the average five-year fixed rate mortgage to its lowest level in 2019 at 2.794 per cent.
Just a month ago this was 2.852 per cent while on 1 January it was at 2.935 per cent – the highest mark of the calendar year so far.
The Moneyfacts data also showed the average two-year fixed rate had dipped over the last month from 2.494 per cent on 16 July, to 2.472 at the end of the week.
While this drop is notable, in contrast to five-year deals, two-year fixes were cheaper earlier in the year and this is not such a long-pronounced decline in rates.