Interest Rates
To fix or Track
Economic uncertainty can be a headache when advising clients on what deal to take. We take a look at the interest rate landscape
Not only the UK economy but the Eurozone in particular currently has well documented financial difficulties. We can, and many already are, talking ourselves into at best a flat economy for the next five years but as we know volatility is the watch word. How many of us would have forecast after the late 80s shock of very high interest rates and increasing instances of negative equity that the economy would go through significant turbulence in the years ahead. Many commentators and governments for that matter have forecast the end of the boom to bust cycles, but here we are again in another trough at a time when nobody would have forecast it. This trough is also lasting a long time given that it was only in 2007 that the UK and mortgage market was originating £367bn of lending. Many commentators forecast that bank base rate would have increased by now above the long term low of 0.5%. This is despite inflation going well beyond 4% this year and in previous cycles this would have signalled to the Bank of England to increase base rates to put a break on inflation. We have arrived at a situation where increasing base rates would be catastrophic for the economy and push us back into recession.
Performance Let’s have a look at how various interest rates have
performed and what the considerations are for mortgage intermediaries given where the economy currently stands. Bank base rate is 0.5% and this is historically incredibly low, but when is it likely to increase? ● Commentators including city forecasters from the big banks are indicating no change in the base rate in 2011 with the exception of Deutsche Bank, which
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in April seemed to think rates this year will double to 1%, and Merrill Lynch in July thought 0.75% was likely. Almost all other City forecasters believe rates will remain unchanged this year.
● Looking at bank base rate in 2012 again the consensus is for bank base rate to remain unchanged throughout the whole of next year and, of the City forecasters, there is quite a spread from that medium. Banks such as Barclays Capital, Morgan Stanley and Nomura think that bank base rate could rise to 1% by Q4 next year with Merrill Lynch pushing the boat out further to 1.5%. Deutsche Bank recommended last April an eye watering 2.5% for next year, although I suspect this will have been revised downwards in the last few months. It is notable that the majority of those banks which have official forecast in excess of 0.5% made those official forecasts in the middle of this year when the economic prospects looked slightly better than they do now.
● Looking at mortgage lenders’ standard variable rates the peak average was in 1998 at 8.62% which compares to 4% in Q2 2011. SVRs reduced gradually after 1998 with a slight upturn in Q3 2007 but have fallen steadily thereafter.
● Looking at 2-year trackers they peaked at an average 6.13% in April 2008 but have reduced consistently since then and in August this year were averaging 2.7% pay rate.
● Moving onto 2-year fixed rates again they peaked in June 2008 at 6.6% and on average in August had
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