Up or Flat?

So what is happening with the Bank of England base rate? Only two months ago Mark Carney, the Canadian Governor of the Bank, stated that he felt rates would remain at 0.5% for the foreseeable future as the world was so uncertain. Fast forward to the start of July and suddenly he’s warning borrowers and businesses to expect an increase – so what’s the story here? Have things changed so much that suddenly a base rate increase looks imminent?

Well, personally I don’t think so. Sure, GDP is up again and tax receipts are increasing, and as such government borrowing is coming down. However unemployment rose in July for the first time in two years, and outside London and the South East, is there really a recovery? Well, I think there is but it’s very weak.

In a normal economic cycle you increase the base rate to restrict the supply of money in the system, and this in turn brings down inflation. Well, inflation is currently at 0%, and with the news that Iran has started to sell oil on the open market we’ll probably see its price come down and create further deflationary pressures.

I think that Carney is signalling to the banks, and to the wider economy, that the 0.5% base rate is still, and always has been, an emergency rate. Simply this means that we are probably too used to cheap borrowing, and he is concerned about a cheap credit bubble building up. I’m not sure that there will be a bubble – the changes to the residential market with the Mortgage Market Review have definitely restricted lending, especially above five times a client’s income. I think that this is a sensible level, any more than five times can be unsustainable. If I have a client whom can easily afford more than five times then I talk to a smaller building society where they look at cases on an individual basis.

Clearly rates are going to increase, but I would be shocked if they go up this year. I’ve still got Q1 2016 pencilled as the first rate rise – I just cannot see how the economy would react positively to an increase before then. There are so many households and businesses struggling to get by whilst paying next to nothing for their borrowing – even a 0.25% increase might push a large chunk of these over into receivership or repossession: not really the bedrock of a strong, recovering economy. There is also a whole generation of personal and business borrowers who have never experienced an increase in the base rate – it’s going to be a real shock to those clients when it finally does increase.

And that is why, in my opinion, Carney has started hinting that the base rate may move. He’s a clever a chap and with his background at Goldman Sachs understands how bankers think. By giving them plenty of warning he’s hoping that everyone will start to take measures to protect themselves against the upcoming increase.

My advice to anyone out there on a low base rate tracker is, if you wish to retain that rate going forward, it would be prudent now to overpay by at least 0.25% - therefore you will already be paying the higher rate when it moves up so it wont be such a shock. Plus, the longer it stays low, the more you will overpay, so its a win-win situation for you. If you are more concerned about longer term rate rises then switch to a five, or even ten years fixed rate. Despite some lenders pulling these products there are still some very attractive longer term fixed deals out there – however I cannot see them getting any lower. Clearly I’ve said this before, in 2013, when rates seemed to be heading up; then suddenly a price war broke out and rates plunged down. Well, I really can’t see that happening again – lenders are making almost no margin on these rates, so surely they cannot drop any further.

If you are considering switching it’s best to do it now before lenders reprice their products. An increase in the Bank of England base rate may be some time away; however I do think that we’ll see a gradual increase in mortgage deals over

“There is a whole generation of personal and business borrowers who have never experienced
an increase...”

the next six months. Don’t get me wrong, I’ll be shocked if we see large jumps in pricing; it’ll be a more piecemeal increase – and historically a five year fixed rate at 3% is still exceptionally low. If you do not make plans now, I strongly believe that you’ll miss out on the sub 2.5% five year deals still available.