The Bank of England announced no change to either base rate or the asset purchase scheme at their November meeting, to nobody’s surprise.
Having just announced an unexpectedly large round of quantitative easing last month (which will take four months to carry out ), it’s unlikely we’ll see any further move before February 2012 – which, coincidently, will coincide with a quarterly Inflation Report. They do like to align changes with reports because that’s the one time they have really fresh comprehensive data to work from. Well, as fresh as it gets in economics anyway.
So, for the time being the outlook is fairly stable. Unless something dramatic happens like, say, Europe going down the drain. Europe is of course already having an impact on our mortgages, even though we haven’t yet hit apocalypse.
The link between Greek and Italian sovereign balance sheets, and the rate you’re looking at for your mortgage may seem a touch tenuous, but it’s very real. As Mr. Peston never tires of telling us, the exposure of UK BANKS – and therefore the British Taxpayer - to those states (and the banks that lent to them) is absolutely eye watering.
It’s the next step though, that isn’t talked about so much but is more relevant to us as real people.
Much of the financial system relies on confidence, and right now Europe doesn’t really inspire it. A key measure of this since the credit crunch is the Interbank rate (i.e. LIBOR). It’s the rate that banks lend to each other, basically. In the old days a rise in LIBOR suggested base rate was likely to go up. In this not-so-brave new world though, a rise in LIBOR means banks are getting frightened again. We know Base rate is going nowhere, but LIBOR has just hit 1.00% - double the BoE rate. We haven’t been here since the summer of 2009 and of course then LIBOR was on the way down.
Frightened banks don’t want to lend – not to each other, and not to you. The first (and let’s hope the only) step they take to restrict lending is putting prices up as it passes on the higher costs they face, and it discourages the consumer. In the last 2-3 weeks most major lenders have increased rates, and they tell us that funding is getting tighter (that LIBOR thing again). There’s increasing concern about how much money will be available to lend next year.
So far it seems to be mainly trackers going up. Most recently Yorkshire increased rates by 0.10% and their subsidiary Chelsea by 0.20%. But fixed rates have also taken a bit of a hit and looking forward, the swap rates (essentially the wholesale cost of a fixed rate mortgage) aren’t looking cheery. Short-term rates have increased around 0.20% since the start of the month and are up almost 0.50% since the lowest point in August.
The concern, then, isn’t so much what’s happening to mortgages right now, but where we might find ourselves in a few months time. If we’re lucky, the Eurozone will find some message to reassure the markets and these concerns will ease. Banks will have money to lend, and at an attractive price. If we’re unlucky and current situation persists, anyone seeking a mortgage in the New Year might find it significantly more difficult and expensive than it is now.