Fixes have been climbing since the start of the year, as I’m sure everyone knows all too well, but a little-reported side to it is that they’ve become completely detached from the swap rates, as this illustration shows:
Even though everyone is bored with being told that there’s more to pricing fixed rates than what swap rates are up to, generally speaking the direction of travel is broadly similar, with a bit of a lag as wholesale prices feed through to retail.
But more or less from 1st January 2012, that went out the window. While the 2-year swap rates have been volatile, they’ve generally bounced around between 3.05% and 3.25%. In the meantime, the fixed rates you and I pay have gone up, and up, and up some more.
Anyone could be forgiven for thinking this is shameless profiteering on the part of the banks. And to be fair, there probably is a bit of margin-hunting going on; after all we’ve seen big names like Halifax and Bank of Ireland increasing their Standard Variable Rates for existing customers, ostensibly to recoup some of the costs they’ve been swallowing since the credit crunch. So it’s reasonable to suppose many other lenders have been doing something similar with new customers too.
However, I don’t think that’s the main issue. As we’ve commented before, bigger lenders have been more cautious this year resulting in smaller players being inundated and forced to increase rates to keep business at a manageable level. The root of the anxiety for those big lenders, I suspect, is the renewed Eurozone crisis - which seemingly stumbles closer to economopocalypse with every passing day.
The illustration above therefore represents the growing terror of what might lie ahead.
Is the red line going to continue climbing further? Well it might, but there are a couple of grounds for optimism.
Firstly, the panic withdrawals have largely eased in the last couple of weeks – the market has been much more consistent and the better rates have held fairly well.
And secondly whilst the average 2 year fixed rate has been moving upwards we’ve seen some big names improving rates of late too (Woolwich and Northern Rock / Virgin Money being notable examples). Not always, it has to be said, to jaw-dropping lows but any rate improvement is encouraging, since it suggests a greater willingness to lend.
For what it’s worth, my guess is that we’ll see more of a stable period for a while and then rates may start to come down a little if the Euro situation eases and/or lenders look to their annual targets and feel the need to increase their lending.