Posted on 15 September 2017 by
10 year gilt yields again briefly dipped below 1% earlier this month. Yields rose after the higher than expected Consumer Price Index (CPI) figures this week and then significantly further yesterday and today following the publication of the minutes of the Monetary Policy Committee (MPC) meeting and then a speech by a previously dovish MPC member, Gertjan Vlieghe.
The MPC minutes indicated an increase in Bank Rate is likely sooner than previously expected, with some economists now forecasting a 0.25% rise back up to 0.5% at the next MPC meeting in November. At the time of writing (around midday on Friday 15 September) the benchmark 10 year gilt yield has risen to 1.31%. Another effect has been a sharp rise in sterling, especially against the dollar which is currently trading at 1.36 to the pound, the highest level since sterling's post Brexit decline.
The key paragraph in yesterday’s MPC statement said:
"All MPC members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations. A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target. All members agree that any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.”
The MPC has cried wolf several times before and then backtracked and so I would put the chances of an increase in November no higher than 50/50. However, whether or not we get an increase in November the mood has changed following the MPC's comments, at least in the short term, and even if Bank Rate does not increase in November the expectation must now be for an increase earlier than was expected only a week ago.
Nevertheless, it is important to get this in perspective. A 0.25% increase would only take Bank Rate back to where it was at the time of the Brexit vote and the expectation remains that whenever Bank Rate starts to rise the speed and scale of such increases will be modest, as indicated by the last sentence in the MPC statement, i.e. “All members agree that any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.”
As far as the impact on mortgage rates is concerned lenders will obviously have to reflect the sharp increase in the cost of money to fund fixed rate mortgages when pricing their fixed rates, but as fixed rates were not cut far enough to reflect the full extent of the fall in funding costs, increases should be modest. However, as any rate changes are now likely to be upwards there is an obvious additional reason to get remortgage applications agreed and submitted as soon as possible.
The interesting question we shall have to wait for an answer to is what happens to Standard Variable Rates (SVRs) when Bank Rate is increased. I suspect those lenders with SVRs at the bottom end of the range, i.e. around 3.75%, will increase their rates in line with the first few increases in Bank Rate but some of the lenders with SVRs in excess of 5% may take the opportunity to narrow the spread between their SVRs and those of the major lenders by leaving their SVRs unchanged, reflecting the fact that they didn’t follow Bank Rate down.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.