The hysteria surrounding the hiking of Bank base rate has subsided again, with the economic news since early August dampening down speculation. However, it is no real surprise. If you listen carefully to what he has said, Bank of England governor Mark Carney has never stated interest rates are definitely going up – there have been plenty of “mights” and “maybes”. We still expect the next rate rise to be at least a year away.
Why? Well, the economic recovery is not bulletproof. And only when it is certain will the Bank risk putting up rates. While members of the Monetary Policy Committee have a much wider discussion around the whole economy than focusing solely on mortgages, a rate rise will inevitably mean a massive squeeze on household incomes. With weak wage growth showing no signs of improving soon, any rise in Bank rate ahead of any improvement in incomes will put highly indebted households in a vulnerable position.
Nevertheless, two members of the MPC, Ian McCafferty and Martin Weale, called for a rise in rates at the last meeting after three years of unanimous 9-0 decisions. The minutes show they believe the rapid fall in unemployment, alongside evidence of tightening in the labour market, has created the prospect that wage growth will pick up.
Rates going nowhere?
But that still leaves another seven members, including Carney, who do not think the cost of borrowing should be raised at the present time. Again, the MPC minutes show this group believes “there remains insufficient evidence of inflationary pressures to justify an immediate increase in Bank rate”. The majority, therefore, still need to be convinced and that could take time. Until then, rates are not going anywhere.
One can understand their reticence as the data is coming through is not showing enough certainty. Unemployment is falling but inflation also fell in July – to 1.6 per cent after June’s five-month high of 1.9 per cent – so there is no real pressure to raise rates. Manufacturing data is inconclusive, with British manufacturing falling back in July, according to the UK Manufacturing Purchasing Managers’ Index.
These indicators are not painting a consistent picture. Only when they are consistently exceeding expectations will rates normalise. Of course, this is another debate – what is the new normal? We expect base rate to end up well below 5 per cent and possibly below 3 per cent for the next decade.
Indications of a slowdown in the housing market continue. The number of purchases being approved is falling, according to the British Bankers’ Association, with July approvals down on June’s three-month high. Tighter criteria introduced following the Mortgage Market Review has been blamed. However, closer to home, SPF had one of its best months in July and August also looks set to be a decent one, in spite of the fact that many people have been on holiday. The housing market is far from being in the doldrums.
Whenever a rate rise does come, borrowers will inevitably be concerned but any increases are likely to come slowly.
In the meantime, a fixed rate will provide certainty and help with budgeting. Historically, fixed rates are also excellent value. When I worked at NatWest in 1991, one of the big advantages of working in a bank was getting a subsidised mortgage at the rock-bottom rate of 5 per cent. It was a massive perk. But nowadays pretty much anyone can fix for five years at less than 3.5 per cent, proving what terrific value there is to be had.