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Industry reacts to Base Rate decision

Amanda Jarvis

May 5, 2006

Ray Boulger of John Charcol, said: “Once again the MPC has kept rates on hold, a decision taken as a foregone conclusion by the market. Unexpected modest boosts to industrial output and high street spending in the latest month have counterbalanced reports suggesting UK consumer confidence is falling. This ninth Base Rate freeze in a row puts increasing pressure on banks and building societies who want to widen their margins as any change in either their mortgage SVR or savings rates becomes very transparent when it can’t be hidden behind ‘Base Rate bluff’.

“Seven of the last nine interest Rate changes have occurred in the same month as a quarterly inflation report and the MPC will have had much of the next report, which is due on 10 May, made available to them before deciding to leave base rate unchanged. With no particularly significant changes in economic statistics currently indicating any need to change Base Rate, August is the next likely date for a possible Base Rate change. Historically, August has been a popular month for the MPC to act – the last two Base Rate moves have been in August.

“Inflated petrol or diesel prices, combined with the inevitable above inflation increase in council tax at the beginning of the fiscal year, is resulting in less disposable income for consumers, which will undoubtedly have been a major factor contributing to the recently reported fall in consumer confidence. Although industry has just produced its strongest figures for six years, according to recent CBI statistics, the recent sharp fall in the dollar – resulting in a six percent drop against sterling in the last few days – will negatively impact on industry’s competitiveness, both for exports and in competing in the home market with imports. However the effective six per cent fall in the oil price, purely as a result of dollar weakness, is a bonus to the UK economy.

“The end of Stephen Nickell’s tenure on the MPC after the meeting is bad news for those hoping for a Rate cut as he has been the solitary MPC member voting for a cut at the last five meetings. With two new external appointees due to replace Stephen and Richard Lambert it will more difficult than usual to predict whether or not there will be a split vote at the next MPC meeting. However, the publication of the quarterly inflation report next week will provide some insight into the bank’s current projections.”

Boulger continued: “Today’s mortgage market continues to be hugely competitive and, with HBOS having taken their foot off the accelerator, C&G and Britannia are now in the driving seat in the two year fixed rate stakes. Some lenders are offering loss leading fixed rates because of the desire for volume in an incredibly competitive market. As a result, the full impact of the recent increase in swap rates, putting them a little higher than they were a year ago, has not been fully reflected in the pricing of the best fixed rate mortgages. Borrowers who want a fixed rate mortgage should act fast. Currently, C&G offer the best two year fix for remortgages, at 4.45 per cent with a free valuation and free legals, but for purchases Britannia’s 4.34 per cent is the market leader.

“For borrowers who don’t need the pay rate certainty offered by a fixed or capped rate, but would consider a fixed or capped rate if they felt the rate was attractive enough, a tracker mortgage with a drop-lock option remains attractive. Drop-locks offer the borrower the option to fix their mortgage at a time of their choosing and therefore are ideal for borrowers who like the idea of a fixed rate but expect rates to fall over the next year or so.”

Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, said: “It is no surprise that the MPC has left the Rate unchanged yet again – especially as we have seen robust economic and housing data in the past few weeks. The UK purchasing managers’ and CML mortgage lending figures have both been higher than expected.

“It will be interesting to see how the Bank of England Inflation Report comments on the economic outlook for the next 12 months, as money markets are currently pricing in the next movement in interest rates as upwards.

“Homeowners and prospective purchasers should take advantage of competitive fixed rate and discounted mortgage products in the high street, as it is likely that short-term fixed rates could be higher in the coming months.”


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