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Decoupling the rates

6th August 2008 | back to article listings BACK    print this article PRINT

Tomorrow, economists have been saying, will almost certainly see the Bank of England's monetary policy committee (MPC) announce that the interest rate has been held at five per cent again.

Faced with the dual threats of higher inflation and lower growth, each of which would on their own provoke an obvious response, the MPC is believed to be likely to keep rates as they are. As Howard Archer, UK chief economist at Global Insight, explained: "I think the most likely decision will be to keep interest rates unchanged this Thursday. They've got a difficult balancing act in terms of the economy could be in recession but at the same time elevated price pressures."

Mr Archer was one of seven economists and institutions polled by Adfero this week, with all expressing the view that the rate will not change. This was also the unanimous verdict of larger polls, with all 38 economists interviewed by Bloomberg and all 76 asked by Reuters giving the same opinion.

As a result, it will come as a major surprise if the base rate is anything other than five per cent tomorrow, whatever the views of last month's would-be rate cutter David Blanchflower or the sole advocate of a rate rise Tim Besley.

But will this mean the property industry is held back from recovering by a maintenance of higher mortgage rates, either for owner-occupiers or buy-to-let investors?

The answer, according to the chief executive of property portfolio managers Young Group Neil Young, is no. Mr Young himself predicted today that the base rate will stay on hold, but pointed out that the buy-to-let mortgage market has seen significant recent movement.

While the base rate has stayed put since April, buy-to-let tracker rates have been cut three times in the last month alone, he pointed out, commenting: "Mortgage rates, particularly for buy to let mortgages have not been closely correlated to the Bank of England base rate for some time."

This, of course, has been occurring because while the base rate stays put, swap rates are falling. This downward movement has seen Abbey announce today that it is making a further cut to its two and three-year fixed rate of 0.1 per cent. Phil Cliff, head of mortgages at Abbey, explained: "Market movements and our mortgage strength allow us to make these further rate reductions to benefit our customers."

Cheshire Building Society also announced a reduction today, with 0.5 per cent off its two, three and five-year deals, plus 0.3 per cent off its ten-year deals, Citywire reports.

So while tomorrow will probably pass with the base rate as it was, the decoupling of mortgage rates means that this will, as long as swap rates continue to fall, not stand in the way of an improving mortgage market that could yet help a revival begin.

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