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Interest rates: what a base interest rate cut would mean for mortgage borrowers

Thinking of taking out a mortgage or remortgaging in 2020? With interest rates remaining at record-level lows, what would a potential further interest rate cut spell for homeowners, apart from the promise of ever-lower fixed-rate mortgage deals?

While an interest rate cut is by no means a guarantee, there is a growing assumption that the base rate will be cut further from the current 0.75 per cent on the 31 January. Does that mean that mortgage interest rates will follow suit and fall even more? Yes; however, there’s more to the consequences of this decision that simply lower mortgage rates.

The current low mortgage interest rates are not just down to the low base rate; or rather the low base rate has set off a chain reaction in which lenders are under pressure to offer ever-lower mortgage rates in a bid to secure a dwindling pool of eligible mortgage applicants.

Current mortgage approval rates lag well behind pre-2008 levels, with fewer first-time buyers coming onto the market every year. The fact is that the current crop of potential first-time homeowners simply doesn’t have the large deposits required for the hugely expensive UK properties (the price of property still sits at over seven times the average UK salary). Add to that unusual income patterns, with a growing number of people in self employment, and it is easy to see that the traditional ideal mortgage applicant lenders have favoured are becoming an increasing rarity.

The fact remains that mortgage lenders cannot afford to lose the custom of those people who can afford a mortgage, but some will find themselves in a situation where they struggle to compete for those applicants. A base rate cut will mean that the UK’s top lenders (the big banks) will either slash interest rates on their top mortgage products, or introduce new mortgage packages with attractive perks, such as cashback, or a combination of both. The reason they can do this is because they have the profit margins to accommodate making concessions to the base rate cut.

This won’t be feasible for small to medium-sized lenders, however, who simply can’t survive on rock-bottom-rate mortgage products. The only avenue for those lenders to keep a sustainable profit margin is by loosening at least some of their lending criteria, or developing more specialist products catering to people with specific circumstances, e.g. self employment, retirement, or buy to let. Those three areas in particular are likely to see an increase of tailored products with better LTVs (loan-to-interest ratios), or more options for repayment strategies on interest-only mortgages.

This is not to say that we will see anything like the loose approach to mortgage lending criteria seen prior to the financial crisis of 2008; the 100 per cent mortgage, for one, is unlikely to make a return. Apart from everything else, all changes will still need to comply with FCA (Financial Conduct Authority) lending regulations. What we are are likely to see in 2020, however, is lenders looking for ways to attract mortgage applicants who are solid, but whose financial profile would previously have categorised their application as non-straightforward.

BY ANNA COTTRELL

Source: Real Homes

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Will the Bank of England cut interest rates this month?

This month’s Bank of England monetary policy meeting is shaping up to be a much more significant one than investors had anticipated.

Following a string of underwhelming macroeconomic data releases and some thoroughly dovish comments from a handful of Bank of England members, currency traders are now bracing themselves for the possibility of a rate cut as soon as the 30th January MPC meeting. This will be governor Mark Carney’s final meeting at the helm of the central bank, and the Canadian is set to be replaced by Chief Executive of the Financial Conduct Authority, Andrew Bailey on 17th March.

The soon to be former governor Carney gave the first real hint that lower rates could be on the horizon at the beginning of the year. Speaking during an event on inflation targeting, Carney stated that there would be a ‘relatively prompt response’ from the bank should weakness in the UK economy persist into 2020. Fellow policymaker Silvana Tenreyro struck a similar tone a few days later, claiming that UK growth was likely to undershoot the bank’s November projections and that she would support a rate cut should the economy continue to slow. Gertjan Vlieghe, who joined the rate-setting board in 2015, was even more forthright in his view, saying that he would vote for a rate cut this month, barring an ‘imminent and significant’ turnaround in UK growth data.

The dovish shift in the committee has come off the back of serially weak UK macroeconomic data since the most recent meeting on 19th December. Of the fifteen data releases that we consider most meaningful since then, nine have surprised to the downside, notably inflation, retail sales and the November growth number. Consumer price growth in the UK is now well short of the BoE’s 2% target. The main headline rate of inflation came in at a three-year low 1.3% year-on-year in December, while the core measure also nosedived to its lowest level since October 2016 (Figure 1).

Figure 1: UK Inflation Rate (2013 – 2019)

Will the Bank of England cut interest rates this month? Commercial Finance Network

Source: Refinitiv Datastream Date: 23/01/2020Retail sales massively undershot expectations last month with 2020, on the whole, the worst year for consumer spending in the UK in twenty-five years according to the British Retail Consortium (BRC). Of even greater cause for concern for policymakers will be the rotten November GDP growth number, which showed that the UK economy contracted by 0.3% month-on-month. While undoubtedly disappointing, it is worth noting that activity in November was very likely to have been dragged lower by the intense political uncertainty surrounding the general election and Brexit – uncertainty that has, of course, since receded.

Figure 2: UK Macroeconomic Data (since December BoE meeting)

Will the Bank of England cut interest rates this month? Commercial Finance Network

That being said, we did receive a much better-than-expected set of business activity PMI data out on Friday that has somewhat cooled expectations for a rate cut. The crucial services index, which accounts for around 80% of overall UK GDP, leapt to a sixteen-month high 52.9 in January, a sharp rebound from the December number. While the manufacturing index remained below the level of 50 that denotes contraction, even this moved sharply higher from December’s lows.

The strength of the data is not particularly surprising, given that it covered the first full month since Boris Johnson’s emphatic election victory on 12th December, which effectively removed the entirety of the short-term ‘no deal’ Brexit uncertainty. We had said prior to the data that we thought the key to whether or not the Bank of England cuts interest rates next week could depend on the strength of the January PMI figures. Now that the data has been released, we think that the MPC will have enough justification to refrain from cutting rates on Thursday, although it is likely to be a close call.

At the December meeting, members Saunders and Haskel both dissented in support of an immediate cut, with the vote split 7-2 in favour of no change. Even following Friday’s strong PMI numbers, we think that there is a decent chance that Vlieghe and Tenreyro follow suit. On the other end of the spectrum, hawks Ramsden and Haldane are very unlikely to vote for a cut this time around, particularly given their recent arguments regarding the need for a more restrictive policy. Jon Cunliffe has recently warned that prolonged easing may risk financial instability. Ben Broadbent has also appeared to place a greater onus on UK labour data, which has actually remained pretty resilient of late. Governor Mark Carney himself appears to be the most on the fence, although we think he’s now more likely than not to side with the hawks at the January meeting.

Figure 3: Bank of England Hawk-Dove Scale

Will the Bank of England cut interest rates this month? Commercial Finance Network

Source:Ebury
Date:23/01/2020In the event of a cut, which we believe would be a ‘one and done’, we actually think that the reaction in the FX market could be relatively mild. This cut, we believe, would be of a similar ‘insurance’ nature to that conducted by the Federal Reserve in the US and certainly not part of a sustained easing cycle. Currency traders also appear to be taking the prospect of lower rates in their stride, with optimism surrounding Brexit offsetting much of the rate cut concerns. During the time in which market pricing for a January cut has risen from effectively zero to more than 50% (07/01-23/01), the GBP/USD cross has actually emerged more-or-less unchanged. So while we would expect a sell-off in the pound in the event of a cut, the magnitude of the move is, in our view, likely to be contained.

Should policymakers again vote in favour of stable rates, our base case scenario, we think a move higher in sterling would ensue given the relatively high market pricing for a cut. With UK economic data expected to improve in the coming months, January may prove to be the last opportunity the bank has to deliver its ‘insurance cut’ before domestic macroeconomic fundamentals simply do not warrant lower rates.

Written by Matthew Ryan

Source: Ebury

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Bank of England policymaker maintains interest rate cut view

Bank of England (BoE) policymaker Michael Saunders has said he is sticking to his view that interest rates should be cut because of weaknesses in the UK’s labour market and wider economy.

“It probably will be appropriate to maintain an expansionary monetary policy stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the two per cent inflation target,” Saunders said in a speech on Wednesday morning.

“With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present.”

Saunders was one of two of the BoE’s monetary policy committee’s (MPC) nine members who voted to cut interest rates late last year.

Since then, several other MPC members — including outgoing BoE governor Mark Carney — have suggested a rate cut may be necessary.

Saunders said that while some recent surveys had suggested Britain’s economy had improved, while others had worsened and remained sluggish.

“But, taken as a whole … business surveys are generally soft and consistent with little or no growth in the economy,” he said.

“My own view is that, even if the economy improves slightly from the recent pace, risks for the next year or two are on the side of a more protracted period of sluggish growth than the MPR (Monetary Policy Report) forecast,” Saunders added.

Sterling was 0.2 per cent down against the dollar in morning trading on Wednesday.

By Anna Menin

Source: City AM

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Carney says BoE could cut interest rates if weakness persists

Bank of England Governor Mark Carney said on Thursday that the central bank could cut interest rates if it looks like weakness in the economy will persist.

His comments sent sterling to a near two-week low against the U.S. dollar as he outlined a debate on the Monetary Policy Committee about whether interest rates needed to be cut now.

Last month and in November, two of the nine policymakers on the BoE’s interest rate-setting committee voted to cut interest rates to 0.5% from 0.75%, though Carney himself backed keeping rates on hold.

Britain’s economy grew at its joint-weakest annual rate since 2012 late last year, and many indicators of the economy remain downbeat despite signs of optimism among businesses and consumers following Prime Minister Boris Johnson’s landslide election win last month.

While Carney also described reasons for optimism, investors honed in on the comments about a possible rate cut, which he linked directly to the current economic outlook — whereas previously he talked about cuts more as a contingency.

“With the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response,” Carney said in a speech at a BoE event on inflation targeting.

Similar language was used in the most recent MPC minutes by Michael Saunders and Jonathan Haskel, who both voted for a rate cut.

Combining possible interest rate cuts and the prospect of more asset purchases, Carney said the BoE’s current armoury was the equivalent of cutting Bank Rate by 2.5 percentage points.

Money markets now price in a roughly 14% chance of a rate cut at the BoE’s Jan. 30 meeting, Carney’s last before he hands over the reins to Financial Conduct Authority chief executive Andrew Bailey, who takes over on March 16.

Markets price in a roughly 50% chance of a rate cut by the middle of the year.

“While this shouldn’t come as a huge surprise given that there has been a couple of MPC dissenters calling for lower rates at the past two policy meetings, it is the strongest hint yet for a rate cut in the not too distant future,” currency strategist David Cheetham of brokerage XTB said.

On asset purchases, Carney said there was room to “at least double” the BoE’s 60 billion pound stimulus package of August 2016, a sum that will increase further as more government bonds are issued over time.

Carney also gave reasons why the BoE might not cut interest rates, citing “tentative” signs that global growth was stabilising and ongoing tightness in Britain’s labour market.

He also said there were early indicators that there had been some reduction in business uncertainty since Johnson’s sweeping Dec. 12 election win.

The rest of his speech focused on possible changes to the BoE’s inflation targeting framework, which he said had served Britain well.

Carney said raising the inflation target, as advocated by some economists as a way to spur growth and escape from years of low interest rates, worked better in theory than in practice.

He also pushed back against those who think the BoE should use its quantitative easing stimulus to directly fund infrastructure or environmental spending.

“In my view, these should be resisted,” Carney said. “While carefully circumscribed independence is highly effective in delivering price and financial stability, it cannot deliver lasting prosperity and it cannot address broader societal challenges.”

Reporting by Andy Bruce

Source: UK Reuters

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Interest rates unlikely to rise in 2020, says ECB policymaker Robert Holzmann

A European Central Bank policymaker has said it is unlikely interest rates will be lifted back into positive territory next year.

Robert Holzmann cited Brexit as being likely to cause renewed concern toward the end of 2020.

The governing council voted to maintain the deposit rate at the historic low of -0.5 per cent in line with market expectations in President Christine Lagarde’s first monetary policy meeting in Frankfurt earlier this month.

“I do not expect a turnaround to a positive interest rate environment next year,” Holzmann said in a statement on Friday.

The head of Austria’s central bank said concern would grow next December toward the end of the UK’s transition period for leaving the European Union.

The UK is currently on course to leave the EU on 31 January with Boris Johnson saying a transition period up until the end of 2020 was non-negotiable, regardless of whether trade and other deals are agreed.

“There is little time for negotiations on future relations, and the outcome of the negotiations is open,” Holzmann said.

The ECB has reiterated earlier this month that rates will stay at the current level or lower until the inflation outlook is close to but below 0.2 per cent, with underlying inflation consistently convergent with that level.

Its annual forecast for real GDP growth for the euro area was 1.2 per cent in 2019, an upward revision of 0.1 per cent, but down 0.1 per cent for 2020 compared with September’s projections at 1.1 per cent.

The forecast for 2021 and 2022 is currently 1.4 per cent.

By Michael Searles

Source: City AM

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Bank of England holds interest rate at 0.75 per cent

The Bank of England has decided to hold interest rates at 0.75 per cent in its last meeting of 2019 as it warned there was little chance of significant economic growth this quarter.

The Bank’s Monetary Policy Committee (MPC) voted 7-2 in favour of maintaining the rate, as it did at its previous meeting in November.

Sterling lost roughly half a per cent against the dollar after the announcement.

UK GDP increased by 0.3 per cent in the third quarter and is expected to rise only marginally in the year’s final quarter.

The monetary policymakers did point out that both sterling and the FTSE had rallied in the last month, with the pound’s exchange rate appreciating by around two per cent.

Minutes from the three-day meeting showed that Jonathan Haskel and Michael Saunders had voted to cut rates by 0.25 per cent.

The two argued: “The economy had been a little softer than expected, and there was a modest but rising amount of spare capacity.

“Core inflation was subdued. Employment growth was slowing and seemed likely to weaken further given trends in vacancies and firms’ hiring intentions.”

However, the MPC said it was yet unclear whether Boris Johnson’s victory would lift the uncertainty hanging over the UK economy.

The MPC said: “If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation.”

It added: “Further ahead, provided these risks do not materialise and the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target.”

Analysts said that the Bank’s wait-and-see approach was “perfectly appropriate for some time yet”, due to the reduction in political risks from the result of the General Election.

Dr Kerstin Braun, president of Stenn Group, said: “Boris Johnson’s win provides the much-needed solidity the UK has been craving.

“Businesses can begin to see their future and now Brexit is confirmed to go ahead, The Bank of England needs to keep the economy steady as we navigate Britain’s exit from the EU.

“But a prolonged period of low growth, low inflation, and low interest rates will limit the Bank’s ability to create stimulus when needed.”

There had been speculation that the MPC would commit to a rates cut. In the Bank’s November meeting, two of the nine-member committee voted for a cut.

The decision comes after inflation data showed that the Consumer Prices Index stood at 1.5 per cent in November, flat on October and half a per cent below the Bank’s target of two per cent.

Earlier this month the US Federal Reserve left interest rates on hold, bringing to an end the cutting cycle instigated in July.

The European Central Bank also held rates in Christine Lagarde’s first meeting as president, downgrading its 2020 growth forecast in the process.

The announcement comes after the Bank said it had referred the hacking of its market-sensitive press conferences to the financial watchdog, after it emerged that an audio feed was supplied to high-speed traders before they were officially broadcast.

The Bank confirmed what it called a “wholly unacceptable” use of a back-up audio feed by a third-party supplier, and said it had reported the matter to the Financial Conduct Authority (FCA).

By Edward Thicknesse

Source: City AM

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BoE will cut rates twice in 2020, BofA says

Uncertainty around the future trading relationship between the UK and European Union will lead to two interest rate cuts by the Bank of England in 2020, a top-ranked research team said.

According to analysts at Bank of America Global Research, Britain’s gross domestic product was set to flatline in the last quarter of 2019.

However, rate-setters at the Old Lady of Threadneedle Street would wait to see how the economic data panned out following the general election before acting.

Their forecast was for a quarterly rate of growth of 0.0% over the three months ending in December.

“Uncertainty remains as unclear what UK-EU trade relationship will apply after next year. We expect short-lived growth bounce,” BofA said in a research note sent to clients.

Purchasing managers indices for the UK needed to “surge” in order to result in even a “mini” growth bounce, they added.

By Alexander Bueso

Source: ShareCast

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Inflation fall could ‘fan expectations’ for interest rate cut, say economists

The fall in UK inflation could fan expectations that the Bank of England might cut interest rates, City analysts have said.

The Consumer Price Index (CPI) slid to 1.5% in October from 1.7% the previous month, according to the Office for National Statistics (ONS).

The decrease, which was greater than analysts had predicted, suggested households will have more spending power ahead of Christmas and next month’s General Election.

Economists have said falling prices will drive calls for lower interest rates, potentially following moves by the US and European central banks to make cuts.

Howard Archer, chief economic adviser for the EY Item Club, said: “Inflation dipping more than expected to 1.5% in October will also likely fan expectations that the Bank of England will cut interest rates before too long if the economy fails to pick up from its current struggles.

“Consumer price inflation looks likely to remain close to 1.5% over the rest of the year and through the early months of 2020 – and it could conceivably edge down further.”

Last week the Bank of England voted to hold rates, despite two members of its Monetary Policy Committee (MPC) calling for a cut.

The policymakers referenced signs that the labour market was cooling, while colleagues were cautious about Brexit uncertainty and a slowdown in the global economy.

David Cheetham, chief market analyst at XTB, agreed that the decrease will push calls for the cut but time is not on the side of the MPC.

He said: “A larger than expected fall in the most widely followed gauge of inflation could lead to further calls for the Bank of England to lower interest rates.

“Either way it is still highly unlikely that we get any movements in rates before the year is out, with the final policy decision due just one week after the General Election.”

On Tuesday, the ONS also revealed that wage growth had slowed to 3.6% in September from 3.8% the previous month. It remains significantly above the rate of inflation.

Emma-Lou Montgomery, associate director for personal investing at Fidelity International, said the inflation slowdown could be “welcome news” for consumers.

She added: “Inflation continues to languish below the Bank of England’s target of 2%, highlighting the impact of a year of uncertainty upon the UK economy.

“With a General Election and Brexit on the horizon, it’s difficult to foresee exactly when the political and economic environment might stabilise, and if nothing changes for the better the Bank of England will be under pressure to introduce an interest rate cut in early 2020.

“Should this happen, savers and investors need to think carefully about how to make their money work hardest, with the prospect of cash returns dwindling even further.”

The inflation announcement had little impact on the pound, fell 0.07% to 1.283 against the dollar.

Source: Shropshire Star

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Why the Bank of England should keep interest rates on hold

The Bank of England must leave interest rates on hold tomorrow and resist the urge to tinker until Britain’s economy is out of the General Election and Brexit fog, City A.M.’s panel of expert economists has said.

Much has changed in British politics since the BoE’s last monetary policy committee (MPC) decision in September. Prime Minister Boris Johnson failed to push his new deal quickly through parliament, leading him to request a Brexit extension and ultimately call a General Election, bringing yet more uncertainty to the economy.

City A.M.’s Shadow MPC today voted eight to one in favour of keeping the main interest rate on hold at 0.75 per cent. The consensus view was that with politics in flux, any move would be guess work and not grounded in any reliable expectations about the future.

Here’s what our Shadow MPC said:

Guest chair: Frances Haque – Santander

Hold: The bank rate should be kept flat. Inflation remains below the two per cent mark with economic growth data for the third quarter looking more positive than the previous quarter. And with real wage growth continuing, there is less of a rush required to create further stimulus. With the current political landscape now in General Election mode and further fiscal boosts on the cards, it seems prudent to wait and see the outcome of the election before making a change. However, if there is further Brexit delay leading to slower economic growth a cut may be required.

Jeavon Lolay – Lloyds Bank

Hold: There is a strong case for waiting for further news before any move. Brexit developments remain conditional on the upcoming election, adding another layer of uncertainty to the economic outlook.

Peter Dixon – Commerzbank

Hold: Economic conditions remain benign and inflation is contained. With the Brexit deadline merely having been postponed another three months, the prudent strategy is to keep the powder dry for now.

Vicky Pryce – CEBR

Hold: And be prepared to do more if needed. UK economy appears to be stagnating as world economy slows down, Brexit worries continue to dampen business and consumer sentiment and forthcoming general election is adding to uncertainty.

Mike Bell – JP Morgan Asset Management

Hold: With an election approaching that could potentially provide more clarity on what type of Brexit, if any, we are heading for, it makes sense to stay on hold for now.

Simon Ward – Janus Henderson

Cut: The case for easing is at least as strong as elsewhere. Inflation is below target and falling while economic weakness has spread to the labour market, with unemployment and redundancies picking up.

Ruth Gregory – Capital Economics

Hold: The chance of a Brexit deal in January suggests a cut would be premature. But unless the headwinds of weak global growth and Brexit uncertainty fade, the next move in rates may be down.

Tej Parikh – Institute of Directors

Hold: With the upcoming election largely making calculations about Brexit and the future path of the economy moot, it’s best to hold interest rates for now.

Joshua Mahony – IG

Hold: Carney had his hands burnt by the mistakenly cutting rates immediately after the referendum. With Brexit and election uncertainty looming, now is the time to wait for the dust to settle.

By Harry Robertson

Source: City AM

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Brexit and mortgages: what next for interest rates and repayments?

What’s next for Brexit and mortgages? Will mortgages become more expensive, and should you remortgage now?

What’s going to happen now with Brexit and mortgages, since the EU has agreed to grant Britain a three-month extension? How does this decision affect potential and current home owners, up to January and beyond? Will we see much of a fluctuation in the Bank of England’s base interest rate, and with it, cheaper or more expensive mortgages?

Martijn Van Der Heijden, Chief Strategy Officer at online mortgage brokerage Habito, comments on the implications of the Bank of England’s decision last month not to raise interest rates:

‘Interest rates remain relatively low which will be welcome news for those looking to get a good deal on their mortgage. This “wait and see” approach from the MPC (Monetary Policy Committee) is something we also see reflected in our own data with a surge in buyers choosing fixed deals for five years or more as they try to “Brexit-proof” their mortgage and lock in the same rate until 2024 and beyond.’

Basically, whether you are first-time buyer or remortgaging, now is the time to lock in a good fixed rate mortgage deal – if you don’t mind losing out somewhat in case the interest rates fall even lower than the current level. Why might that happen? It all depends on how the final Brexit deal is negotiated, and how smoothly it is executed. In the still possible event of Britain not securing a deal, the pound is likely to fall, and inflation will rise, which could lead the Bank to slash the interest rates even further. If this happens, and you are on a variable rate mortgage, you could see your repayments fall.

On the other hand, in the event of an orderly Brexit and a strengthening economy, interest rates could rise, which would be good news for your savings and wages, but not so good news for your variable rate mortgage repayments. A fixed rate deal would protect you from any significant interest rate spike, at least for a few years.

Which scenario is more likely? The truth is, nobody knows. We would say, though, that taking out a variable rate mortgage might not be worth the gamble under current uncertain circumstances – you could win a little, or lose big, so a good fixed rate deal will at least allow you to relax a little, for a while.

BY ANNA COTTRELL

Source: Real Homes