Record low rates show no sign of abating

As we head towards the end of 2014, it is a great time to opt for a fixed-rate mortgage with a number of lenders reducing their rates. This is partly due to increased competition between lenders, but is also quite common at this time of year when lenders look at their year-end targets and see what they have to do to meet them.

For first-time buyers, home movers and those remortgaging, it means there are plenty of competitive rates available.

A fixed rate will be useful when interest rates do start to rise, although there is little agreement as to when this might be. In his comments at the annual meeting of the Trades Union Congress, the Bank of England’s governor, Mark Carney, seemed to suggest that rates could start to climb from their record low of 0.5% in the spring.

However, this is not guaranteed. The economic news since early August has dampened down earlier speculation about a rate rise but if you listen carefully to what Carney has said on the subject he has never stated that interest rates are definitely going up – there have been plenty of ‘mights’ and ‘maybes’.

The problem with any rate rise is that the economic recovery isn’t bullet proof.

And only when it is certain will the Bank risk putting up rates. While members of the Monetary Policy Committee (MPC) have a much wider discussion around the whole economy rather than focusing solely on mortgages, a rate rise will inevitably mean a massive squeeze on household incomes. With weak wage growth showing no signs of improving, any rise in Bank rate ahead of any improvement in incomes will put highly indebted households in a vulnerable position.

Nevertheless, two members of the MPC, Ian McCafferty and Martin Weale, have again called for a rate rise preferring to increase Bank rate by 25 basis points.

The minutes show that they believe economic circumstances were sufficient to justify an immediate rise.

But that still leaves another seven members, including Carney, who don’t think the cost of borrowing should be raised at the present time. Again, the MPC minutes show that this group believes ‘there remained insufficient evidence of prospective inflationary pressure to justify an immediate increase in Bank rate’.

The majority, therefore, still need to be convinced and that could take time. Until then, rates aren’t going anywhere.

One can understand their reticence, as the data that is coming through is not showing enough certainty. Unemployment is falling but inflation also continues to fall – down to 1.5% in August and then 1.2% in September – so there is no real pressure to raise rates. Manufacturing data is inconclusive, with UK manufacturing growth up just 0.1% in August.

These indicators are not painting a consistent picture. Only when they are consistently exceeding expectations will rates normalise. Of course, this is another debate – what is the new normal? We expect base rate to end up well below 5% and at least below 3% for the next decade.

Carney himself has said that less important than the timing of a rate rise is the expectation that any increases would be ‘gradual and limited’. Borrowers need not panic therefore, but it is still worth planning ahead and opting for a fixed rate if you would struggle to pay your mortgage when rates do rise.

This articles has been provided by Andrew Nolder, Associate Director and by Miranda John, International Manager of SPF Private Clients Limited.