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BoE votes in favour of forward guidance

Robyn Hall

August 7, 2013

Under the new policy of forward guidance the BoE will periodically promise to keep interest rates at a particular level.

As such the MPC confirmed that it intends to keep interest levels at the current level of 0.5% until unemployment drops below 7%.

The MPC also said that it stands ready to undertake further asset purchases while the unemployment rate remains above 7% if it judges that additional monetary stimulus is warranted.

Ben Thompson, managing director of Legal & General Mortgage Club, said: “Providing this degree of certainty with regard to interest levels will in some ways help businesses and consumers to plan with more confidence however although some might argue this is the death knell for fixed mortgage rates, there are strong arguments to suggest this is not the case.

“Notwithstanding today’s announcement, there is only so far out that one can forecast interest rate levels accurately.

“Many mortgage borrowers buy fixed rates and typically pay a slight premium for doing so, as these products enable them to budget monthly with the full knowledge that during the fixed rate term, rates won’t rise.

“There are no caveats or get-outs in these terms, if a mortgage rate is fixed for 5-years, it is fixed for 5-years.

“Making a commitment like buying a first home, or moving into an expensive new home requires a level of comfort and confidence that longer term fixed mortgage rates can provide. The Bank cannot give guarantees over anything like this timeframe.”

As such Thompson said that it’s highly unlikely that borrowers will change their buying habits based on the forward guidance on rates but it could make the market more predictable.

He said: “This new measure should however remove some knee-jerk volatility from markets and stop them running ahead of themselves, meaning that sudden interest rate and borrowing spikes ought to be a thing of the past, barring highly extreme market conditions.

“That landscape should inspire more consumer confidence, but not the death of the fixed rate mortgage.”

Peter Rollings, CEO of estate agent Marsh & Parsons, added: “With his statement today Mark Carney has given the UK’s housing market a significant boost.

“The London market, in particular, is presently underpinned by rising positive sentiment due in part to the Government’s Funding for Lending Scheme and the Help to Buy initiatives as well as strong demand from home and abroad.

“Growth in the country’s GDP, reduction in unemployment and a feeling that we are finally out of the economic badlands means that the market can now be assured of certainty as far as interest rates are concerned.

“This is a highly important statement which will allow lenders to offer attractive fixed rate deals to potential buyers and will surely lead to greater demand and activity in both the resale market and provide a fillip for first time buyers.

“The Governor is implicitly saying interest rates will not rise until ¾ million more people are in work. This will give the market across the UK much welcome stability.”

And Charles Haresnape, residential mortgages managing director at Aldermore, said: “Today’s announcement is welcome news for homeowners, providing some much-needed guidance from the Bank on where rates are going.

“Whilst nothing is ever certain in today’s economic climate, given forecasts suggest it will be 2016 at the earliest before rates rise, homeowners will be looking more closely at longer-term fixes or to choose a tracker for the foreseeable future.”


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