This Month’s Decision: HOLD
The Bank’s base rate has been at its historic low of 0.5% for just over 5% of the Queen’s reign but as the euro’s unravelling gathers pace, its collateral damage is rapidly escalating. It would be a brave person who bet against that 5% not hitting double figures.
Christine Lagarde, managing director of the International Monetary Fund, has suggested that the UK Bank rate should be cut further. This, coupled with her comment that the Greeks should pay their taxes – a rather hypocritical remark when she pays none on her salary – has meant that the assumption that the next move in Bank base rate would be upwards, with the only question when, is now being challenged in a few quarters.
A base rate cut to 0.25%, or maybe even zero, would be great news for those with a tracker mortgage or an SVR capped for term at 2% over Bank base rate. However, it would put many bank and building society balance sheets under further pressure. That would increase the risk of a rate increase for borrowers not protected by any guarantees.
Thus the consequence of cutting Bank base rate would be to reduce mortgage costs for borrowers who, in general, already have the lowest rates and are under the least financial pressure. This is at the risk of a little further down the road increasing costs for borrowers, including many mortgage prisoners, who are more likely to be under pressure. So it is hard to see what boxes a base rate cut would tick.
Although the UK’s latest monthly retail sales figures have shone a little light on the generally gloomy economic outlook, all the indications are that monetary policy will need to continue to be accommodating for the foreseeable future.
The main debate this month should not be about whether the Bank base rate needs to change but whether to increase quantitative easing.
The fairly sharp fall in the oil price recently has improved the inflation outlook, which reduces concerns about more QE stoking it up.
Although the UK economy hasn’t changed much in the last month the risk of infection from the dark clouds of Eurogeddon has.
The Bank needs to keep some ammunition available to react rapidly to further negative developments on the euro front line – it won’t have to worry about how to react to positive developments. So I vote this month to leave both Bank rate and the QE programme unchanged but to be prepared for a rapid response to developments if necessary before the July meeting.
More QE may well be appropriate as part of the response to further shock waves from the eurozone but different, and perhaps untried, policies may also be necessary. Now is the time to consider options and their relative pros and cons.
Senior technical manager, John Charcol
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