Posted on 8 December 2011 by
TODAY'S MPC MEETING A SIDESHOW WITH ALL EYES ON THE ECB MEETING
• Eurozone crisis Summit will Determine the Fate of he Euro
Ray Boulger of leading independent mortgage adviser John Charcol comments on the news that the MPC left Bank Rate unchanged today for the 33rd consecutive month at its lowest ever rate of 0.5% and made no change to the Quantitative Easing programme.
“The Bank of England has said that the current rate of implementation of Quantitative Easing, £15-20bn p.m., is the maximum it can sensibly do. So with the £75bn QE programme announced in October only half way through implementation there would be little point MPC at this stage confirming an extension of the programme. Likewise, even though the FSA may want lenders to stress test their Balance Sheets for a drop in Bank Rate to 0.25%, with 3m sterling Libor decoupled from Bank Rate and having slowly but remorselessly edged up to the current level of 1.05% (and most retail savings accounts linked to Libor already paying virtually nothing), a cut in Bank Rate will have little impact on banks' and building societies' funding costs.
"It would, however, reduce the borrowing costs for those with Bank Rate linked mortgages and other loans, unless a collar applies, and so overall would have a negative impact on banks' balance sheets. This is at a time when the Bank of England will be particularly keen to avoid any self imposed stresses in view of the need to shore up balance sheets to cope with the further damage which will almost certainly be inflicted on them as the Eurozone crisis escalates.
"The MPC has said it has other things it can do if necessary to stimulate the economy and it may need to employ some of these before it's next meeting, depending on how the markets react next week to the Eurozone summit.
What Does This Mean for Mortgages?
“With gilt yields and swap rates close to all-time lows borrowers could be forgiven for expecting mortgage rates to have fallen further over the last month. However, both tracker and fixed rates have gone in the opposite direction, although there has only been a small impact on 5-year fixes. This is because funding stresses caused by the Eurozone banking crisis have resulted in lenders having to pay sharply increased spreads above Libor for new funding. The higher spread is now a bigger factor in the cost of new funds than the increased Libor rate. One result of this is that savings rates are being bid up as it becomes more expensive to fund in the wholesale markets. Therefore the impact of the funding squeeze is not limited to the banks that use the wholesale markets - it also affects the cost of funds for any institution that uses the retail savings market.
"We don't know how long this crisis will last but it will not be resolved quickly. Therefore a key message for anyone taking out a new mortgage, or contemplating a product transfer, i.e. switching to a new rate with their existing lender, is to think long term, especially if they have a relatively small amount of equity. It looks increasingly likely that Bank Rate will remain at 0.5% until 2014 and with rates for the best lifetime trackers only slightly higher than those for a 2 year tracker, plus some of the best lifetime trackers having no early repayment charges, there seems little value in most 2 year trackers. Because of the benign outlook for interest rates the premium one now has to pay for a 5 year fixed rate mortgage, compared to a tracker, has fallen to levels which also make this attractive buy for those who like interest rate security. This suggests either buying either a lifetime tracker or a reasonably long term fixed rate, say for 5 years.“
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