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John Charcol comments on base rate hold

Ray Boulger of John Charcol, independent mortgage adviser, comments on the decision by the Monetary Policy Committee to keep base rate on hold at 4.5%:

He says: “Whilst it was a foregone conclusion that base rate wasnt going to move, the MPC meeting will have had much to take into account due to the impact of Hurricane Katrina. The global economic reaction to this devastating event has been very sensible, by releasing strategic oil reserves they have clearly driven the price of oil down by around 5%. This has reduced the inflationary risk which could have inhibited the MPC from cutting rates in a few months time. Whilst the MPCs focus is on the UK economy, an unfettered oil price could have pushed inflation up to 3% which would have made them reluctant to even consider a further cut this year. With the pressure of this mitigated the Bank now has more scope for another base rate cut. When the next base rate cut happens is not the most important factor, what is most pivotal is that the next move will be downwards.”

He adds: “Some lenders have put their fixed rate mortgages up this month and some down depending on when they last priced them and how aggressive they are being in the market. As ever it is the Swap rates that we need to examine and these have recently fallen close to earlier lows. If the money markets start expecting more than a quarter point cut in the future Swap rates will fall further. Its the expectations of where base rate will move, not the actual movement that will determine the pricing of fixed rate mortgages.

“Clean two-year fixes start at 4.24%, three years at 4.35%, five years at 4.49% and ten years at 4.65%. Thus, the premium payable for long-term security is small. However, the longer the term one locks into, the more confident one needs to be that rates wont fall much further. Despite todays rates offering good value for borrowers who need or prefer payment security, I expect to see even lower rates over the next few months as the economy will require more stimulus over the next year than will be provided by one base rate cut.”

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