The rate rise debate

Mortgage Introducer

April 4, 2018

Richard Adams is managing director of Stonebridge Group

Judging by the reaction to this month’s Monetary Policy Committee (MPC) meeting at the Bank of England, you would be forgiven for thinking that a Bank Base Rate (BBR) rise at the next meeting in May is a foregone conclusion.

The decision to hold rates at their 0.5% level – voted through by seven to two – has been viewed as merely an aperitif to the main course which will be delivered in just over a month’s time, when the Bank is expected to serve up, at the very least, a rise up to 0.75%.

Given the most recent inflation figures – a monthly drop between January and February of 0.3%, taking it down to 2.7% – it might well have been expected that MPC members would (on the whole) want to keep their powder dry for at least another month or so, in determining whether a rise was necessary.

The fact that two members, Ian McCafferty and Michael Saunders, were not even willing to wait that long, perhaps tells its own story in terms of which way the wind is blowing.

But, I hear you say, isn’t the Bank’s target for inflation 2%? And isn’t that move downwards a suggestion that further rate rises might not be necessary in terms of pushing it down further?

After all, the move up to 0.5% in November could have been construed as having done the job, especially when you consider that the Bank also believes the post-Brexit rise in inflation has now, to a very large extent, blown itself out.

However, there is an underlying belief that those within the Bank of England – and recent public pronouncements from the Governor and other employees suggest this – are wanting to rise rates further in order to curb potentially large-scale inflationary pressures, such as wage inflation.

Many have pointed out that unemployment – currently at a rate of 4.4% – is low, and you would have to go back to the 1970s to see it at similar levels, which is why there is the potential for significant pressure on wages which could increase considerably.

Given this future, it might well want to argue further for interest rate increases now in order to curb this, which would certainly chime with the more forceful messages coming out of Threadneedle Street which appear to look far more in the direction of frequent, smaller rises.

In that regard, the markets appear to be betting on a 25 basis points increase in May, with another potentially following before the end of 2018. We may even see two more during this calendar year, followed by a similar pattern in the years ahead, before we get up to that ‘new normal’ BBR of between 2-3%.

Which leaves advisers currently in a very strong position in terms of accentuating the positives of remortgaging before we embark on a steady progression upwards in rates.

While we may not see product rates rising in precisely the same correlation as BBR, we have to expect that the 0.5% environment, and the rates it generated for borrowers, is not going to last beyond the end of the year, potentially finishing in just a few short weeks.

Therefore to ensure clients are getting the best rates, the rate-specific communications should be flying out the door, plus if these are borrowers you have not seen for the last couple of years or so, then there are clearly opportunities to be had in terms of generating both protection and GI business.

A lot of things can change in 24 months-plus so make sure you are determining client needs as they are today, not what they might have been two/three/five years ago.

The other point to remember in all of this is that lenders are going to be all over existing borrowers like the proverbial rash. We’re all aware of the importance of product transfer business to them, and they won’t be leaving any stone unturned in their quest to secure that repeat business, even better if it’s without any broker involvement to pay for.

So, make sure, your client base is in no doubt about what the future is likely to hold for BBR and subsequently product rates – there is time to secure some very competitive rates before any rise, but that time is likely to be running out.

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