Quantitative easing should be good news for fixed rate mortgages

We have seen mixed movements on fixed rate mortgages this month with some lenders.

They include Cheltenham & Gloucester (on its five and 10-year fixes), Coventry and Halifax, increasing some rates and others, including Chelsea, Cheltenham & Gloucester (on two and three-year fixes), Northern Rock and Principality cutting them.

As far as trackers are concerned the lenders who pulled their rates last week have been slower than usual reintroducing them.

Perhaps they wanted to see what today’s Bank of England Quarterly Inflation Report was going to say first.

If so, it does not bode well for the introduction of new trackers with similar margins above Bank base rate to those just withdrawn.

The increased indications that Bank base rate will fall further, with some economists already forecasting a fall to 0% as early as next month, will not encourage lenders to launch new good value trackers.

They will also not be encouraged by the fact that three month LIBOR has only fallen by 6 basis points (0.06%) to 2.08% since last Thursday’s 0.5% Bank base rate cut.

But comments from the governor of the Bank of England today made it clear that quantitative easing, in other words the Bank buying longer term gilts and other securities, such as asset backed securities, from the private sector, was likely to start as soon as next month and this had a dramatic effect on gilt yields.

Two year gilt yield fell by 0.3% and five and 10 year yields were down by 0.23%, huge falls in a single day, especially on the longer dated stocks.

This has been reflected in swap rates, albeit not fully yet, with two year swaps down 0.19% to 2.01%, five year down 0.16% to 2.92% and 10 year down 0.12% to 3.66%.

This suggests that fixed rate mortgages should get cheaper over the next few weeks, and if the quantitative easing works well the increased supply of money in the system should even mean a little more competition between lenders.

But I won’t be holding my breadth for that just yet.