Ray Boulger comments on BoE base rate decision
“The main economic indicators that are the key to base rate decisions have shown little movement in the last month, so this outcome was never in doubt. Although next month looks likely to produce another freeze the next Quarterly Inflation Report is due in May and so this can’t be considered a foregone conclusion. A disproportionate number of base rate changes occur in the months of this report.
“After Richard Lambert’s resignation two months prior to his term finishing, in order to take up the position of director-general of the CBI, there were only eight members of the committee this month. As a result the vote will probably have been 7 – 1, or close to it, with Stephen Nickell again the most likely dissenter.”
“One thing banks and building societies hate is an extended period with no change in base rate. A change in either direction gives them a convenient opportunity to adjust borrowing and savings rates by more or less than the base rate change to react to competitive pressures and widen their margins. Whenever we have an extended period without a base rate change, reducing savings rates or increasing their Standard Variable Rate, such as Halifax’s recent cuts in savings rates, always attracts more attention, even if lenders try to sneak them in.”
What should borrowers do now?
Boulger continued: “Although we still expect the next move in base rate to be down, it now looks more likely that we will only see one cut this year. As a result of this, coupled with some cut throat competition in the two-year fixed rate market, there is added reason to consider a fixed rate now. Several lenders have increased their fixed rates this week or are planning to do so next week, but a few have gone the other way. Of particular note for borrowers who want at least £500,000 is our flexible two-year fixed rate exclusive, 3.99 per cet fixed to 30 June 2008 with a 0.25 per cent arrangement fee and an early repayment charge (ERC) only within the fixed rate period. Funds are likely to run out on this deal fast.
“Some lenders are engaging in trench warfare in the two-year fixed rate market to try to get the free publicity that goes with a best buy entry. Thus, although many lenders have been increasing their fixed rates in response to the small rise in swap rates Portman have just reduced their two-year (to 30 April 2008) fixed rate from 4.35 per cent to 4.3 per cent, quite clearly in response to Britannia undercutting them yesterday by reducing their two-year fix from 4.89 per cent to 4.34 per cent. Britannia and Portman both rely heavily on best buy entries when they want to beef up volumes and so it will be interesting to see if Britannia respond next week or retire hurt.
“There are also some excellent trackers available, with Bank of Scotland’s flexible Bank Base Rate – 0.51 per cent with a £1,199 fee, with a free valuation and free legals for remortgagers, being the cream of the crop for loans in excess of £140,000. Thus borrowers are spoilt for choice at the moment, as long as they use a genuinely independent broker, who by definition will have access to the whole market.”