Ray Boulger comments on base rate decision

Amanda Jarvis

March 9, 2006

Boulger said: “As February progressed and the latest month’s economic figures were released, it became increasing clear that the MPC wouldn’t cut the base rate in March. The seventh consecutive static month follows contradictory and therefore unclear economic statistics, with the UK consumer showing an ongoing reluctance to spend, despite a modest improvement in the housing market.

“The recent further large hike in energy prices and the well above inflation increases in council tax due for next month, will curtail consumer expenditure further, although of course these increases will impact negatively on the CPI. However, the CPI has fallen gently over the last few months and is currently 1.9 per cent, the same as last month, and just below the government’s two per cent target.

“The Bank of England’s view of the likely strength of the UK economy over the next few months is significantly more bullish than that of most outside economists and it appears the MPC will wait for further evidence of a slowdown before sanctioning a rate cut. However, we firmly believe this is a question of when, not if.

“The minutes from last month’s Monetary Policy Committee meeting revealed Stephen Nickell as the only member voting for a cut for the third month in a row. He will no doubt vote the same way this month and if he is joined by any other members of the committee it will be an encouraging indication of an early cut. With Mr Nickell’s term ending in May and the next quarterly inflation report due that month, a quarter point cut in May currently looks a strong possibility.”

What should borrowers do now?

Boulger continued: “With very strong competition amongst lenders there are still plenty of good value fixes on offer, both short- and long-term, with a new market leading two-year fix due to be launched on Monday at 4.25 per cent. However, as the market is not factoring in, to any significant extent, even one base rate cut this year, swap rates, and hence the cost of fixed rate mortgages, will fall if we get any reduction in base rate.

“Therefore I expect to see even cheaper fixed rates over the next few months. For those borrowers who don’t need or want the payment rate certainty offered by a fixed or capped rate a tracker mortgage with drop-lock option remains an attractive option. Drop-locks allow the borrower to fix their mortgage at a time of their choosing and therefore they are ideal if rates come down as anticipated.”

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