Nationwide slashes fixed and tracker rates

Posted on 16 July 2008 by Ray Boulger

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If you thought yesterday’s UK CPI figures, up from May’s 3.3% to 3.8% p.a. (compared to a consensus forecast from economists of 3.6%) were bad take a look at the US CPI announced today. Consumer prices in the US increased by a massive 1.1% in June, the biggest monthly gain in 26 years, and after a 0.6% increase in May. This takes the annual inflation rate to a 17-year high of 5.0%, compared with 4.2% last month.

However, despite recent speculation that the Fed would soon start increasing rates as a result of strongly rising inflation Federal Reserve Chairman Ben Bernanke spelled out clearly yesterday that the Fed would only raise rates if evidence emerged that the higher prices for basic goods were being passed through into other prices and wages. That seems unlikely in the current economic environment, even though CPI inflation hasn’t peaked yet.

Mr Bernanke is adopting the same principle that Mervyn King set out in his Dear Darling letter after the UK’s CPI breached the 3% level in May. Thus Bank of England and Fed policy is aligned, with both central banks recognising that the risks of recession outweigh the short term inflationary threats.

Now that there are ever increasing signs of the pressure even the non housing related economy is under the question is not which way will the next Bank Rate move be, but how long will we have to wait for the next cut and how low will it go. With the credit crunch being a major factor in making a recession more likely Bank Rate could easily fall to at least 4% next year.

More confidence that the next move in Bank rate will be down comes from the City’s reaction to yesterday’s CPI figures. Despite the higher than expected inflation rate swap rates yesterday continued their downward plunge, with 2 year swaps falling another 7 basis points to 5.82%, compared with a peak of 6.5% only a month ago, although short term swaps have edged a little higher today.

Nationwide have today announced big cuts in many of their fixed and tracker rates and this reaction to the CPI figures may well have given them the confidence to announce such deep cuts. Congratulations to Nationwide, not only for such aggressive cuts, but also for aligning their purchase and remortgage rates, after bigger cuts in those remortgage and product transfer rates which were previously generally 0.1% higher than the purchase rates. As a result remortgagors and existing customers doing a product switch will now qualify for their cheapest rates and remortgages still get a free valuation and free legals. In addition all their mortgages offer all the flexible features, although overpayments without incurring an early repayment charge (ERC) are limited to £500 p.m., compared with most lenders’ 10% p.a. Improving the £500 p.m. maximum ERC free facility to 10% p.a. should be top of Nationwide’s list for IT changes.

Many of Nationwide’s new rates are market leading, or close to it, and as all their trackers have a droplock facility this makes the trackers an attractive option for clients who take my view that, despite the fixed rate cuts, it is still too soon to buy a fixed rate.

Category: Bank of England, Interest rates, Mortgages

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