When the Bank of England choose to raise bank rate by 0.50% last week, it was the highest single rate rise since 1995, some 27 years ago as the UK was in the midst of Cool Britannia. What most of us wouldn’t give for the biggest debate of the day to be whether Oasis or Blur would be number one next week.
August’s meeting saw the Monetary Policy Committee vote 8-1 in favour of the rise as the bank continues to try and counter rising (or) rampant (or) regular (or) rife (or insert your own word that starts with r) inflation. A brief reminder (not that you probably need it) that the bank has a 2% annual target, and the UK is currently running at 9.4%. Have chalk and cheese ever been so far apart? The bank is also predicting that inflation will hit an eye-watering 13% before the end of this year.
Another word that starts with an r is one that no-one wants to hear: recession. The National Institute of Economic and Social Research has stated that the UK is likely to enter a recession in the third quarter of this year and that it is likely to remain in that state until at least the first quarter of 2023. Not great news, to say the very least. It’s the very definition of a double eddged (sic and sorry) sword. No-one wants a recession, but by having one inflation will become more manageable.
I’m not sure we would call that good news, but we always try to find those silver linings. On that note, let’s try and find a few more.
Are there any silver linings?
The good news (relatively speaking) is that the rise was pretty much as expected. In addition, a number of economists are now going on record saying that we may be close to the end of the rate rise cycle. If you look at Swap Rates (to remind you, the rate at which banks lend to each other and a determiner of fixed rate mortgage pricing), three, five and ten-year money is all lower than two-year money. This suggests that the market feels like rates will soon peak and start to come back down.
There were some interesting comments earlier this week from the Deputy Governor of the Bank of England, Dave Ramsden, Let’s call them a bronze lining. Ramsden stated that “Personally, I do think it’s more likely than not that we will have to raise the Bank Rate further, but I haven’t reached a firm decision on that.” Of course, at pure face value, it feels like more rises are coming. But the very fact that Mr Ramsden expresses a lack of certainty should be viewed as a positive. And, to add to the bronze, he noted that a new fall in inflation expectations in the financial markets was encouraging.
As well as using interest rates. the Bank is planning to move Britain’s economy off its massive stimulus programmes by starting to sell government bonds – a process known as Quantitative Tightening (QT) – as soon as next month. Asked whether the Bank would continue to sell bonds it if needed to go in the opposite direction and cut interest rates to support the economy (something investors expect to happen next year), Ramsden said this was a possible scenario. He said that he was not ruling out a situation where the Bank looks at the overall risk to the economy, having been raising Bank Rate, and at some point start lowering it quite quickly. What do silver and bronze make?
So, what does this mean for mortgages?
We said if before, but we still remain in a low interest rate environment. There is still good value to be found in the fixed rate market with rates just a tad over 3%. If your situation allows you to take a longer-term fixed rate, then they are a little cheaper so offer a tad more value. And, of course, it goes without saying (but we will anyway), if you need budget certainty then they are the only route to take.
But, having spent what feels like an awful long time talking about fixed rates alone, tracker rate mortgages are coming back into play. Their initial rates are lower than their fixed counterparts and for those people who can afford more rises in their mortgage before it potentially comes down, they are beginning to look like an option worth of consideration. We can explore that with you in detail should you like us to. Without wishing to sound like a schoolteacher handing out an overzealous lecture, generic advice just won’t do.
Finally, we still find ourselves at the mercy of lender service levels, so acting early is always advisable. We’ll help you navigate the lender market and ensure we arrange the most appropriate deal for your individual circumstances. If you need us, you know where we are.
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