"A common misconception that a rising BBR means rising mortgage product rates can be dealt with by advisers with some effective explanation and advice"
A month ago I was reflecting on a Budget announcement which didn’t seem to have major relevance to the housing and mortgage markets, certainly in terms of sector-specific announcements - with the added caveat being that of course most significant budgetary changes have some effect on confidence and therefore some measure of impact on housing and mortgages.
At the time, the more significant part of the Budget appeared to be the OBR forecasts which appeared to be bullish in terms of both inflation and interest rates and, a month on, appear to be even more optimistic in the sharp light of reality.
It was perhaps no surprise to see the Government focusing on these forecasts of an inflation rate of 2.9% by the end of the year, and a forecast Bank Base Rate (BBR) peak of 4.3% during quarter three this year. After all, they were far more optimistic than the Bank of England itself and indeed many other economic forecasts at the time.
A month on, and with inflation still in double-digit figures – currently 10.1% at the time of writing - and a 2.9% rate seeming like it’s a long way away, I wonder whether the OBR might already be reconsidering its forecasts, and whether the Government is wondering whether its pledge to halve inflation this year is already looking like a tall order.
With a couple of weeks to go – and we’ve all seen how quickly things can change recently – it now seems almost inevitable that the MPC will choose to increase BBR again, probably to 4.5%.
As has been pointed out many times already, the Bank/MPC really has limited tools in order reduce inflation, and while it is at such high levels – even if it is anticipated we’ll see some significant falls in the coming months – increasing BBR appears to be its only option.
A decision to increase BBR to 4.5% is going to immediately put it above what the OBR suggests was likely to be the 2023 peak – somewhat strangely the 4.3% I mentioned above - which it wasn’t anticipating seeing until quarter three this year.
In other words, there is really no period of BBR ‘stability’ because inflation remains stubbornly high, and the Bank will feel it has to act.
Whether this is the right decision or not, remains to be seen. Certainly, and quite justifiably, there will be many making the argument that repeated and rapid increases to BBR over the last year have made no discernible dent in the inflation level, so what makes you think it will now, and isn’t the Bank just adding to the cost of living crisis for those who have mortgages which will go up again if/when rates are raised? I have certainly heard that argument from consumers, baffled by the policy.
Plus, of course, if it’s already anticipated that inflation is going to fall anyway in the coming months, then why not hold BBR to see if this does play out as anticipated?
The counter argument might well be that inflation will fall more quickly by the Bank acting, but I would have sympathy with those who might be sceptical of this.
There is some glimmer of light here of course, and it is one that mortgage advisers in particular should be making the most of, and that is the continued disconnect between BBR and mortgage product rates. I’ve written before about the client communication opportunity that any change to BBR affords advisers, but this is even more important at the moment when a rise in BBR will not necessarily result in higher product pricing.
Indeed, for almost all LTV levels in recent weeks, it’s been quite the opposite. Longer-term fixes specifically are benefiting from five/seven/10-year swap rates generally tracking below 4% at the moment, and we’ve also seen keener rates in shorter-term fixes as well.
A common misconception that a rising BBR means rising mortgage product rates can be dealt with by advisers with some effective explanation and advice, and a market reflection which might not be as pessimistic as some existing and would-be borrowers might well be assuming.
The next MPC meeting date is the 11th May – mark it in your diaries and be prepared to communicate with your entire client base on what any change may or may not mean for them.
