Negative interest rates will 'increase the pressure to lend', says Ray Boulger

Negative interest rates will 'increase the pressure to lend', says Ray Boulger

Ray Boulger of independent mortgage adviser John Charcol comments on suggestions from Paul Tucker to the Treasury Select Committee that negative interest rates are on the agenda.

He commented:

"Negative interest rates will increase the pressure to lend and the mortgage market would be a major beneficiary of any such action. This increases the likelihood of genuine cuts in 2 year fixed rates (as opposed to lower rates financed by higher fees) as well as a further narrowing of the yield curve with the scope for more cuts in longer term rates as well."

"Today's comment from Paul Tucker, a Deputy Governor of the Bank of England, about the possibility of negative interest rates, opens up a whole new area for debate about how best to stimulate the economy.

"Mr Tucker said that he has previously raised the topic of negative interest rates and the fact that he has now chosen to go public with this suggestion implies that there is now more consensus at the MPC than at even 3 weeks ago at its February meeting that more stimulus of some sort is needed.

"Floating new ideas in public prior to implementation, to avoid shocking to the market, appears to be part of the recent more transparent policy from The Bank, perhaps influenced by the forthcoming arrival of Mark Carney.

"Mr Tucker said "We'll continue thinking about policy options" and "I hope we will think about whether there are constraints to setting negative interest rates. This would be an extraordinary thing to do and it needs to be thought through very carefully."

"Paul Tucker also highlighted the fact that the euro problems have not gone away, saying that while the risk from the euro area had receded, it remains "a major threat." The indecisive Italian election result is just the latest event to remind markets that the fundamental flaws in the euro experiment have only been patched over.

"In the U.S. later today, Ben Bernanke, Federal Reserve Chairman, will deliver his semi-annual testimony on monetary policy to the Senate Banking Committee in Washington and it is inconceivable that the Bank of England and the Fed did not speak to each other about what would be said to the TSC and Senate Banking Committee and so Bernanke's comments will be watched in the UK with even more interest than usual.

"Gilt yields fell a little yesterday, demonstrating yet again that the rating agencies are a busted flush, with the markets having worked out well before Moody's how gilts should be rated. Yields have fallen again today but this appears to be more in response to the Italian elections than Paul Tucker's comments. At the time of writing UK and German 10 year bond yields have today fallen 8 basis points to 2.0% and 7 basis points to 1.47% respectively, whereas Italian, Portuguese and Spanish bond yields have all risen sharply, the former by 36 basis points to 4.85%. However, the euro problems are part of the reason for the MPC considering further drastic action and so these issues are all interlinked.

"A key aspect of any move to negative interest rates would be to encourage banks to lend more by making it expensive to keep excess liquid assets on deposit at The Bank. This is rather ironic as the Basle 3 rules and pressure from the FSA on lenders to increase their liquid assets has had the exact opposite effect.

"Most tracker rates do not have a collar and so in the event of a bank rate cut most borrowers with a tracker mortgage would receive the full benefit, as would those on an SVR directly linked to Bank Rate, i.e. borrowers on the old Nationwide, Cheltenham & Gloucester and Lloyds TSB SVRs. However, SVRs generally are unlikely to fall but many borrowers on SVR could still benefit by switching to one of the cheaper fixed rates that are likely to result."

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  1. Arron BardoeArron Bardoe28 February 2013 11:20:56

    Before brokers start rubbing their hands at the prospect of a rate drop, I would add the following observations: 1. When the base rate was 5.25%, a fixed year fixed was around 4%-5% and trackers were 0.5% above base. Since base dropped to 0.5%, the current 5 year fixed rates are still around 4% to 5% and the margin on trackers has been increase to 2% to 3%. Many borrowers are not put off by these rates and lenders know that. A below zero base rate may therefore have no effect on the cost of residential mortgage borrowing at all. 2. Commercial loans are better examples of how the base rate has dropped and margins increased with some commercial loans now seeing the pay rate higher than 5 years ago. 3. Thereon, many commercial loans are now linked to LIBOR. 4. Almost all new trackers and even some of the old ones have a get out clause for the lender. For example, Halifax follows the Bank of Scotland base rate and so BoS could simply not reduce their rate. 5. Lenders have to balance the wishes of savers, who have been the worst affected by low rates. In my experience, the biggest problem with FTBs is not the lack of mortgages or ability to get them (I have been able to place every FTB enquiry for the last 2 years), it is their lack of saving for a deposit and to sacrifice their lifestyle. They all want a newbuild that is fully furnished with no capital outlay at all. We need to re-educate the FTBs first. 6. Further, if savers get negative rates, they will start putting their money in other European Banks (including Gibraltar and Jersey), which then limits the cash flow for domestic lenders and makes lending more expensive as they will have to borrow it from eslewhere. 7. Once we go below zero, will the Bank of Engalnd ever been able to raise rates again without negative press and fears of another recession? Though Japan has a host of issues causing its stagnation, a negative base has hampered efforts to change this. It seems the Bank fo England is under pressure to do something and only has one tool for the job, but using it does not mean it will work.

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  2. Steve PackerSteve Packer28 February 2013 13:44:58

    I normally agree with Ray`s editorials and enjoy his comments. However in this case I wonder why he feels Negative interest rates will "increase the pressure to lend". I am in commercial mortgage broking and for 19 years passed business to NatWest/RBS and HBOS and around 6 years with Lloyds TSB, until the demise of the banks . Lending was stiff, but good, and rates were normally around Bank base plus 2.5%. Lower for larger transactions. Since the start of 2010 I met with the Banks and was told the rates had to be increased and they would be, start point Bank base +3.5% - 3.75% and they have increased certain sectors to Bank base +4.25% during 2012. (Cartel?) They say that when Bank base is so low ! the rate charged over base needs to increase to cover operating costs. Over 20 years ago I worked for a Lender specialising in Commercial Lending. I once calculated ( on our loan book ) that we needed circa 2% over Bank base rate to cover overheads/staff costs etc, and 0.5% to cover for bad and doubtful debts. So if we did not write a deal over Bank Base rate of more than plus 2.5% there would be no profit and no sound reason to write the deal. Therefore if, as now proposed we work with "Negative" interest rates the only way to increase the Lenders appetite to lend would be ?, to increase the rate over base.? Hardly what is wanted. I also suspect that when Bank base rate does move back upwards again the Banks that have increased the rate over base by 1% and more will not rush to their clients and drop the rate of base on these mortgages.

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