To Fix or Track?
Posted on 19 June 2008 by
This week has seen the release of a whole raft of statistics and other information which will have a strong bearing on the path of Bank Rate over the next few months.
The CPI figures for May were slightly worse than expected at an annual rate of 3.3%. Breeching 3% triggered the requirement for Mervyn King to write his second letter to Alistair Darling to explain why the Bank of England had failed to keep the CPI within the target 1-3% range. Despite this letter anticipating that the CPI will exceed 4% in the second half of this year it provided some comfort to borrowers, as did the Chancellor’s reply.
This was because the heightened inflation level is being caused by global factors outside the Bank’s control, primarily huge increases in the price of fuels and commodities. Mr King said “There are good reasons to expect the period of above-target inflation we are experiencing now to be temporary.” The exchange of letters indicates the MPC, supported by The Chancellor, will not feel the need to increase Bank Rate if it continues to expect inflation will fall back sharply next year towards the target range without an increase in Bank Rate.
The MPC minutes were also comforting as the vote was 8-1 for no change, with the dissenting member, David Blanchflower, again voting for a 0.25% cut. Mervyn’s King’s Mansion House speech yesterday evening was more hawkish and today’s retail sales figures were amazingly strong, but one month’s figures can often be misleading.
2 Year swap rates closed today at 6.49% and 3 month Libor at 5.96%. Despite the disconnect between Bank Rate and money market rates at these levels the market is discounting a 0.5% increase in Bank Rate, and this is of course reflected in the price of fixed rate mortgages. Those lenders who haven’t increased their fixed rates in the last week are likely to do so shortly and so if you want a fixed rate get in quick.
However, with the current initial rate on tracker mortgages generally at least 0.25% lower than a comparable fixed rate and Bank Rate unlikely to rise more than 0.25% this year, and quite possibly not at all, there is a very strong argument for borrowers who don’t need the security of a fixed rate to buy a tracker. The general expectation, which I share, is that Bank Rate will have to fall next year to compensate for a weak economy, and some forecasts are that it will fall below 4%. However, even if Bank Rate doesn’t fall at all, trackers will still prove to be cheaper than a fixed rate providing Bank Rate doesn’t average more than 5.5% over the deal period.
Categories: Bank of England, Mortgages, Interest rates
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House hunter says:
Either they allow wages to stagnate and accept that there will be less money in their pocket (and not letting the debt inflate away, as it did in the 1970s) or they demand more money in which case Merv has said the interest rate hammer will come down.
So taking a bigger debt than you can afford is a bad idea as it will either stay as a millstone for years or the payments are about to rise, sharply.
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