Damp Squib Game as No BoE Rate Rise
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What an anti-climax! It seems everyone was braced for a rate rise last Thursday except for the Bank of England…
The very obvious reference to Netflix’s huge hit Squid Game in the subject is certainly a factor in the decision, as the very high level of debt in the UK on both personal and public finances does make things very fragile. However, there are other factors, so let’s dive into that and a few other relevant themes that we saw in the last week:
Bank of England vote 7-2 to hold rates
In the end, the vote wasn’t even close. A clear majority of the MPC (Monetary Policy Committee – the rate-setting section of the BoE) wanted to leave interest rates at 0.1%.
As I have talked about extensively, and as financial markets had priced this in, a rate rise was expected so this was a bit of a surprise.
Andrew Bailey, the Governor of the Bank of England, was on the Today Show on Radio 4 the day after the vote, explaining his team’s decision to hold rates, which you can read full details of here. In a nutshell, they felt the rise in energy prices and still as yet unknown impact of the end of the furlough scheme posed too much risk for households to also take a rate rise at this moment in time.
It has become almost irrelevant now when the BoE raises rates. It has very much broken into the mainstream that mortgage rates are on the up and the BoE is soon to raise rates, so to that end, I can see why they held back. What is also interesting to note is that expectations have also changed. Rather than most people expecting a few interest rate rises next year, after which the BoE holds the base rate around 1%, we are now set to see more increases over a longer period of time, with the Base Rate topping out at around 1.25% in 2023. So we could be set for even higher borrowing costs than we initially expected.
Worst of all, I now owe Nick Plappert £50 as I thought they would raise rates this month…
House prices reach new record high
Nationwide, one of the UK’s largest mortgage lenders, and therefore purveyor one of the most reliable house price indexes, say that due to the 9.9% annual price growth they saw in October, the average UK home went over £250k for the first time ever to £250,311.
And the bank’s chief economist Robert Gardner says that if the labour market “remains resilient, conditions may stay fairly buoyant in the coming months – especially as the market continues to have momentum and there is scope for ongoing shifts in housing preferences as a result of the pandemic to continue to support activity.”
When talking specifically about the expected rate rises in the coming months, and what impact that may have on mortgage products, he said “likely to be modest,” with the share of outstanding mortgages on a variable interest rate at its lowest level on record, at circa 20% (in 2011 this metric stood at 60%).
So with more than 80% of current mortgage holders on a fixed rate, this won’t have a big impact on the majority of homeowners.
Money markets pegged back a touch after the BoE decided not to raise rates last week.
If the new expectations are true, that the base rate will go to circa 1.25% by 2023, the current batch of 5 year fixed rate products look exceptional value so we do expect those to readjust in the coming weeks.
Nonetheless, our default position stands, unless you have any specific needs, we would most likely recommend a longer-term fixed rate if you have a 25% + deposit/equity, but keep it short term or flexible if less than that figure.
In the last week:
3 Month Sterling = down by 0.025 at 0.225%
2 Year SWAP = down by 0.067% at 1.171%
5 Year SWAP = up by 0.014% to 1.278%
Bank of England Base Rate = Held at 0.10%
2 Year Variable from 0.51%
2 Year Fixed Rates from 0.89%
5 Year Fixed Rates from 1.14%
BTL Rates from 0.99%
The actual rate you will be offered will be dependent on your personal circumstance and deposit level. Please speak to one of our advisers so that they can guide you through this process.
Source: Twenty7Tec November 2021