Written by on February 3, 2023
Although the initial media focus on the February bank rate decision was on a 0.5% increase, that wasn’t the most important part of the MPC announcement. Reaching a destination that is widely expected by most market participants, as was the increase in the bank rate to 4%, will not in itself have a significant impact on market prices.
More important was the dovish tone adopted, for the first time since interest rates began to rise. Although the MPC cautioned in its comments that “there were significant uncertainties about the outlook”, it now appears unlikely that the bank rate will hit 4.5% in this cycle and a strong possibility that it will peak at 4%.
The MPC also commented: “The current bank rate setting is likely to keep inflation below target over the medium term. As the policy stance becomes increasingly constrained, this would bring forward the point at which it must be reversed.” Recent price increases.
The impact on the gold market has been massive, with massive one-day yield drops – for example, the 5-year gold bond yield fell by 30 basis points. Swap rates have matched the decline in gold bond yields and as a result we can expect a new benchmark of less than 4% to be quickly established for competitive 5-year fixed mortgage rates.
With initial discount and discount rates moving higher than the best 5-year fixed rates – and in many cases in the near future perhaps also 2-year fixes – the decision to choose a fixed or variable rate (tracking or discounting) becomes more difficult and is a discussion that every Borrowers with an independent mortgage advisor, depending on their personal circumstances.
The argument for sticking with a discount rate tracker or rate is that even though the payout rate will likely be higher than the rates available at the new flat rate, it’s one worth paying in anticipation of a cheaper flat rate later this year. The downside to this argument is that you will eventually need a cheaper flat rate to make up for paying more over the next few months and it will be difficult to know when to switch; Fixed rates may now decline more slowly, and as the MPC said: “There is significant uncertainty about the outlook.”
However, since most trackers don’t have any ERCs, anyone with a tracker who’s planning to move in the next year or so might feel that paying a slightly higher price than what’s available at a fixed price is a good trade-off for not having any ERCs.
Aside from the impact on the mortgage market, there will be many other side effects from lower gold bond yields, including a bonus for the advisor with a significant reduction in borrowing costs from the UK government.
Another obvious implication of mortgage rates peaking lower and earlier than previously expected, and soon beginning to fall, is that house prices will fall less than seemed likely in October of last year.
Although many economists like their seasonal adjustments, my point is that seasons are now largely unrelated to home prices, although they are not related to transaction volume, and there is little doubt that the recent decline in home prices is due to other factors.
And based on the nationwide real home price index — that is, not the most widely spread seasonal indicator — prices fell 5.6% from the August peak through January, with a 1.4% decline in January. In a blog post I posted on 11/10/22 shortly after the Truss/Kwarteng mini-budget, I expected the annualized index to turn negative in March or April of this year, but it now seems very likely that it will happen as soon as this month.
I also suggested that rates would be down 15% from their peak but with the end of economic illiteracy under Liz Truss and the subsequent rapid improvement in interest rate expectations I now think the decline will only be about 10%.
category: Ray Bolger