Base Rate increase getting closer

Interesting times for interest rate watchers.

After a fairly subdued Inflation Report earlier in the month, and comments from Bank of England Governor Carney that were widely interpreted as ruling out any increase in Base Rate this year, money markets dropped significantly, sterling weakened, and mortgage lenders started reducing their rates again.

So everyone relaxed, until this week when we found out that two members of the Monetary Policy Committee voted to increase rates right now. Which caused a bit of consternation as you may imagine.

Base Rate has of course been at 0.50% long enough to be in school now, and this is the first time anyone has voted for an increase since June 2011.

Back then we’d had three members of the MPC voting for a rise consistently for around 6 months (one of whom, Martin Wheale, was among the two this time – the others are no longer members) but then the European situation deteriorated and it all went away.

Which goes to show nothing is guaranteed, and whilst there’s rather more confidence about future moves this time around, it leaves borrowers with a dilemma.

Over the last week or two we’ve seen improvements from mortgage lenders including Virgin Money, West Brom, Coventry, Clydesdale, Birmingham Midshires and Natwest. Woolwich has just launched market-leading 5-year fixed rate mortgages including the first one under 3% for over a month (though only available to those borrowing £0.5million I’m afraid).

Standard form would now dictate that fixed rate mortgages start increasing again, but so far market reaction has been muted and we hear rumours of more lenders cutting rates next week.

So it’s finely balanced. On one hand, as a Base Rate move gets closer, pressure to increase rates will grow - wait too long and you’ll miss out.

On the other hand, the traditional year-end scramble for business means lenders will resist it as much as possible, and if the money markets stay low we may yet see further improvements.

That said, anyone on a variable rate mortgage is probably looking at increased payments before too much longer, so the bird in the hand may well be worth more than a slightly cheaper one in the bush.

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