The economy is growing, inflation is back on target and 167,000 extra people have jobs. Hooray.
Or perhaps Boo. The natural media response to this big tub of economic ointment is of course to start hunting for bluebottles - in this case a supposed incipient disaster for borrowers who’ve been just scraping by / living the high life (delete as appropriate), thanks to rock-bottom interest rates.
The Bank of England, as if we could forget, set an unemployment rate of 7% as the key measure that determines whether they’ll consider increasing the Base Rate. Now that the unemployment target is not so much in touching distance as invading our personal space, the question is how soon they’ll act.
Needless to say this has come around far quicker than expected. When the 7% unemployment target was announced, it wasn’t forecast to be met until mid 2016. So at the time the sense was that the Base Rate can had been kicked down the road and we could forget about it for a while.
There’s nothing inherently brilliant about 7% unemployment, as two million people will tell you, and while I wouldn’t suggest it was a figure selected in order to give a 3-year horizon, it seems unlikely they’ve have used that figure if it was expected to be hit in 6 months.
So that underlying intent of low rates for longer suggests the Bank won’t be in any rush to raise rates, even on the back of much improved conditions. And there are a couple of further considerations that argue against raising rates.
Firstly, part of the good news – inflation being back on target – weakens the argument for raising rates at the moment (and in fact if inflation fell much further it could present a whole new set of problems, but let’s not think about that!).
Secondly, the money markets are acting as a counterbalance: as soon as the unemployment figure came out, sterling strengthed appreciably – there’s huge concerns that a stronger pound could undermine exports and ultimately weaken the recovery, so the Bank of England will want to avoid pushing that any further. It says a lot about the still fragile state of the economy that expectations of a Base Rate rise could do enough damage to prevent an actual rise taking place.
In similar vein the wholesale funding markets (our old friends the swap rates) took a decent jump as well. That’s probably an overreaction that will correct itself in the coming days. Nonetheless longer fixed rates are already under pressure (a number of lenders have increased 5yr rates since the turn of the year) and without the support of cheap Funding for Lending money, lenders may be especially susceptible to short-term volatility.
So the fact remains that if you’re shopping for a mortgage right now a possible rate rise in the near future may well never happen, but it can hit you in pocket anyway.