Governor Mark Carney announced a 'forward guidance' strategy last year, stating that the Bank would consider a rate rise only when the unemployment rate, which was 7.8% at the time, fell to 7% - however, this threshold wasn't expected to be crossed before 2016. Recent figures show that the unemployment rate is now edging closer to this threshold, and the Monetary Policy Committee expects the official figures for January to show unemployment at 7%.
This has prompted the MPC to explore whether it is appropriate to raise rates for the first time in five years from the record low of 0.5%. Mark Carney said the interest rates would still be far below pre-crisis levels, with a forecast from the bank suggesting rates could be at 2% in 2017.
The Inflation Report said:
"The actual path of bank rate over the next few years will, however, depend on economic developments."
"Even when the economy has returned to normal levels of capacity and inflation is close to the target, the appropriate level of bank rate is likely to be materially below the 5% level set on average by the [Monetary Policy] Committee prior to the financial crisis."
Stephen Johnson, Managing Director, Commercial Mortgages, Shawbrook Bank, responded:
“The Bank of England’s decision to keep interest rates low and to adopt a policy of gradual rate rises, will reassure lenders and borrowers alike. However, we shouldn’t let the continuing low interest rates lull us into a false sense of security. The current forward guidance is dependent on a range of external economic developments that can’t be controlled and things can change unexpectedly or develop faster than anticipated.
"Shawbrook supports Mark Carney’s efforts to build a sustainable economy, and the industry needs to do its part to ensure that lending is sustainable. In practice this means investors should be careful about how their portfolios are geared and lenders need to ensure the clients investment strategy can withstand the inevitable rise in interest rates.”
Jeremy Duncombe, director at Legal & General Mortgage Club warns borrowers not to sleep walk into high mortgage repayments:
“Despite this latest development, borrowers can’t afford to be complacent. Lenders will price in a change in base rate well in advance of any decision to increase and therefore the historically low rates we have seen in recent times are not going to be around for long. The reality is, that a rate rise of just 0.5% could see the average mortgage bill increase by £750 per year. Five year fixed rates have already begun to rise. The five-year swap rate, used to calculate the loans, hit 1.7% in January up from below one per cent last spring. This rise is a 65% jump in relative rates.
Borrowers should therefore look at their options and talk to an advisor to tie down a more favourable deal while they still can. A mortgage is the largest financial commitment many of us will take out in our lives so it is crucial that borrowers make changes that are suitable for their own circumstances. Speaking to a mortgage adviser is the best way to understand all the options available and to secure one of the good deals that are still available at the moment.”
