Monetary Policy Committee (MPC) meetings are always eagerly anticipated in our world but I think it’s now fair to say that this month’s – taking place on the 21st September – will be watched as closely as any in recent memory.
Over the past year it has been one steady and consistent stream of decisions to increase Bank Base Rate (BBR), and even as inflation has dipped in recent months – albeit not core inflation – the general feeling appears to have been one in which future rises were also likely, if not probable.
However, comments this week from the Bank of England Governor, Andrew Bailey, to the Treasury Committee, appear to suggest that the MPC might be at a point where it feels rates have peaked, and there is a danger in heaping more rises on consumers and the UK economy in general.
So, what do we make of this? Well, it’s not necessarily a sign that the Bank intends to drop BBR anytime soon. Indeed, there are members of the MPC who have recently espoused a ‘higher for longer’ approach to rates, which would see BBR remain at its current level for a longer period, rather than increasing again only to have to bring them down shortly afterwards.
As we stand, that appears to be the more likely scenario that will play out, certainly throughout the rest of 2023, and perhaps even if inflation – as the Governor also expects – shows a “marked” decline.
Which moves us on to what this might mean in the UK mortgage market? It is not without some irony that Bailey’s comments came on the one-year anniversary of Liz Truss becoming Prime Minister, especially as it was her administration’s decision to increase spending/cut taxes with no apparent idea of how both would be funded, that resulted in the market we have now.
That, as we know, was a seminal moment in our recent economic history, and one does genuinely wonder whether borrowers would be faced with such high interest rates on their mortgages right now, were Liz, Kwasi et al, not given the keys to both Number 10 and Government.
There’s no doubting that rates would have increased over the last 12 months anyway but there is a very sound argument to suggest they would not have needed to move so much and so quickly, were it not for that ill-fated 45-day ‘Premiership’ – and I use that phrase in its loosest terms.
However, that is the current hand we have been left with, and it is still not a pleasant one for a borrower community who would clearly prefer mortgage rates beginning with a two or three, rather than the five and six we currently have.
Of course, BBR is just part of the story when it comes to mortgage rates – and not a very big chapter at all for many lenders – but it has been noticeable over the past week or so that we have started to see the big residential players cutting rates, no doubt trying to pick up volume and market share to take them through the rest of 2023 and into next year.
Even with such cuts we can’t truly say that borrowers are in a much better position but it’s perhaps some positivity to hold onto. The likelihood does appear to be that, if the MPC does not carry out a 15-meeting streak of raising rates this month, then this might well provide a real signal that BBR doesn’t need to go any further in order for the Bank to get somewhere near its 2% inflation target.
That, in turn, should hopefully be reflected in swap rates – indeed, you might say it is already being reflected here – and we will be able to turn a trickle of rate cuts into something more like a stream.
This would be particularly beneficial for those first-time buyers who only have small deposits but who would like to take the opportunity to benefit from slight falls in average house prices. Currently, however, as mentioned, most longer-term fixed rates available for 95% LTV products are well over 5%, and for two-year fixes, above 6%, which represents a significant affordability obstacle for many borrowers.
A significant shift in the rates ‘mood music’, starting with a ‘no change’ decision from the MPC later this month, might however herald a domino impact in terms of ongoing product rates, and while I am not expecting anything fast and furious in terms of cuts, we may well be about to embark on a journey in the opposite direction for the first time in a very long time.
That, in itself, would be a positive to grasp in a year which has not presented too many for both new or existing borrowers.
Patrick Bamford is head of international business development at Qualis Credit Risk, part of AmTrust International
