QE2 could revive the longer term fixed rate mortgage sector

Posted on 6 October 2011 by Drew

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Despite much speculation of a shock rate cute, the unchanged Bank Rate was very much par for the course. However it was the MPC’s decision to increase QE by as much as £75bn, (utilised over the next 4 months), which has caught everyone on the hop, and suggests the UK’s economic outlook may be more bearish than most economists have been saying. The main area which the MPC is particularly well-informed on, compared to outsiders, is the health of the banking system in general, which makes the introduction of QE2 a worrying development in that context.

Inflation
Although the MPC still says CPI will rise “above 5% in the next month or so” it is being more positive saying it expects CPI to undershoot the 2% target in the medium term. The MPC added that though recent hikes in utility prices will boost short term inflation, the price falls of oil and other key commodities over the last few weeks will help it fall back sharply in the medium term. Also last January’s VAT rise is eliminated from the calculation in the new year, which will help with the reduction.

More QE
For QE2 the Chancellor has confirmed that eligible assets for purchase are as per the previous Chancellor and include gilts and private sector assets. So far almost all of the purchases have been gilts, and Mervyn King has given the clear impression he is much more comfortable buying gilts than private sector assets, so unless we hear to the contrary, it seems any significant change of policy on the type of asset bought is unlikely.

The biggest question in the MPC’s statement is what maturity terms the Bank will primarily focus on. Since the  announcement, short dated gilts up to 3 years are virtually unchanged, but  yields on longer dated issues have not only fallen but the yield curve has continued to narrow, a very apparent trend over the last week.

What Does This Mean for Mortgages?
If the Bank does concentrate its buying power at the longer end of the gilt market, it should allow lenders to reintroduce longer term fixed rates, say at least 10 years, and at a keener margin over the 5 year rates than we have previously seen. Although in the past demand for longer term fixed rate mortgages has been fairly small, the ongoing economic uncertainty both domestically and globally may tempt more borrowers to fix for longer.

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