Inflation figures unhelpful for fixed rate mortgages
Posted on 24 March 2009 by
On an annual basis the February CPI index, announced this morning, increased from 3% to 3.2% and the RPI fell by just 0.1% to zero. These figures came as a big shock to the market as UK economists had all forecast CPI would fall and that RPI would go well into negative territory.
The best explanation I have seen for the surprising figures is from Rob Pike of the Office for National Statistics. He explained that the cost of certain items, especially imported vegetables, toys and fuel, was still rising. He also said that the impact of December’s VAT cut from 17.5% to 15% was being reversed. A substantial number of shops which passed on the VAT cut in December seemed to have changed that by February, he added. "We have seen many prices return to the previous selling price in November, or even gone beyond that. And that is quite widespread."
His comment about VAT is particularly interesting as it highlights what most sensible people thought about the Chancellor’s announcement that he was going to increase public sector borrowing by £12.4bn by reducing the VAT rate from 17.5% to 15% for a year. Couple this overt criticism of Government policy with Mervyn King’s shot over the bows via the Treasury Select Committee this morning warning the Chancellor off large tax cuts in the budget and the Government spinners are being kept busy today.
The impact of these inflation figures on fixed rate mortgages will be negative in the short term. Short dated gilts are little changed today on the inflation figures but the yield on gilts for 5 years and longer has risen sharply, by 14 -19 basis points, having at one stage risen even further. These increases will largely be reflected in swap rates, which will push rates for 5 years and longer back up to around their level prior to the sharp drop following the Bank of England’s announcement about the quantitative easing agreed at the March MPC meeting. Two year rates however are still a little lower than in early March.
Although the downward trend of inflation will probably resume next month these figures do highlight that nothing in this market is a done deal. The increased swap rates will curtail any further cuts in fixed rates in the short term and may even result in some of the more competitive rates increasing modestly.
Categories: Bank of England, Mortgages, Interest rates
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