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Market watch 28 April 2008

Swaps leapt up last week in the biggest weekly increases I can remember. I would hate to guess why but maybe it’s because the Bank of England’s £50bn Special Liquidity Scheme to get the banking sector moving again may mean inflation won’t fall as far as it would have done if financial Armageddon fell upon us and borrowers couldn’t afford to take out new mortgages.

  • One-year money is up 0.28% at 5.71%

  • Two-year money is up 0.38% at 5.40%

  • Three-year money is up 0.45% at 5.39%

  • Five-year money is up 0.35% at 5.31%

That said, the scheme has had an immediate impact on three-month LIBOR, which has plummeted a massive 0.05% to 5.88%. I hope it has more of an effect in time.

It was fascinating to see a three-way split in the Monetary Policy Committee’s base rate decision earlier this month. Six members voted for a 0.25% cut and two others voted to keep the base rate on hold at 5.25%.

David Blanchflower voted for a 0.5% cut. But thefact that two members voted for the status quo shows the MPC is nervous about inflation.

MPC member Tim Besley said in a speech last week that the committee should concentrate on managing inflation rather than attempting to lessen the impact of downside shocks to the economy.

He also said that the Special Liquidity Scheme should allow the MPC to focus on its task of using monetary policy to target inflation.

The BoE scheme will help the mortgage market but it’s not a panacea. One year with an option to extend won’t help the banks massively. What happens if the BoE doesn’t allow extensions but lenders need them?

The BoE may not want to go beyond one year because the £50bn liquidity injection would then appear on the national debt. This would be embarrassing for the government, which is more concerned about PR than the economy or financial markets.

And it’s a shame that the scheme only applies to loan books held by larger lenders and a few mutuals at the end of last year.

None of the specialist lenders that only use brokers for distribution will benefit.

It was unnerving to see the Royal Bank of Scotland trying to recapitalise and it attracted lots of negative headlines in the press.

It didn’t help that only a month ago chief executive Fred Goodwin said a rights issue was unnecessary.

Nevertheless, if other banks follow its lead confidence will return to the credit markets. It’s a cathartic process for RBs and by rebuilding its capital base other organisations will be happier to lend, once banks have washed their dirty laundry in public.

Who says the broadsheets are boring and stuffy? I was delighted to see a story in a weekend edition of the Financial Times recently about the RBS rights issue, headlined ‘Rights said Fred’ – genius. (Not so good was The Sun’s ‘Riise to be cheerful’ on Wednesday morning Ed).

Good news for television viewers. Apparently Halifax is reviewing its staff as stars campaign so hopefully we won’t be seeing Howard Brown on our screens any more.

Some of the Halifax advertisements were memorably awful, es- pecially the line “I can see it in your ISA that your money would be nicer…”

It is a shame that it isn’t worth quoting mortgage product rates in this column anymore because by the time you read it they will have gone up in smoke.

I feel sorry for those compiling best buy tables. It’s a bit like painting the Forth Bridge – by the time they finish they have to start all over again because the rates at the top have disappeared.

Jonathan Cornell is managing director of Hamptons MortgagesHero of the week is Abbey after it cut its two-year tracker and flexible mortgage rates by 0.1%. Rate cuts in the market are rarer than sensible government decisions these days.

Villain of the week is Northern Rock, which announced it is cutting its SVR by just 0.1%. Chancellor Alistair Darling’s plea for banks to pass the base rate cut onto clients only applies to lenders he doesn’t own.

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