The Bank of England on ‘forward guidance’ had indicated that interest rates (the Base Rate) was unlikely to go up from it’s 0.50% all time low UNTIL the UK unemployment rate fell to 7.0%, a level not expected until 2016 – so the fall in unemployment to 7.1% this month, is causing interest rate confusion, but who actually controls the interest rates that matter e.g. 2,3,& 5 - year fixed rate mortgages?
The short answer is NOT the Bank of England, it is the capital markets, as it is the buying and selling of the major institutional investors e.g. global pension funds, in global government bonds like UK Gilts, that determines the interest rates on every maturity EXCEPT the very short dated Base Rate, in the 2, 3,5,7,10 and 30-year bond issues.
So why does this matter to the likes of 2 to 5-year (and beyond) Fixed Rate Mortgages?
It matters as the government bond yield curve from 2 to 30-years ESTABLISHES THE FLOOR on bank lending rates, as banks can rarely borrow cheaper from the capital markets than the better quality/rated government to fund themselves, and lend money on to businesses and consumers.
My point being, is that with the best will in the world, the BoE does not control commercial interest rates, IT IS THE UK GOVERNMENTS CREDIT WORTHINESS (AND EXPECTED FUTURE INFLATION RATES) THAT DETERMINES our interest rates, as it is that market perception that means there are MORE buyers than sellers of UK Gilts, which brings interest rates down.
So will the BoE raise the Base rate from 0,50% anytime soon? It is highly unlikely, but in the February inflation report, they are likely to publish new guidelines, possibly based on other economic data than the traditional inflation and more recently targetted unemployment, reports.
What we have to remember is that the Base Rate in ‘normal’ times can be 2 to 4% OVER the UK inflation rate, now well below 3%, so once the BoE believes that UK economic conditions is anything like normal, the Base Rate and 2 to 30-year UK Gilts will (relatively) substantially move UP in yields (interest rates), in turn driving bank Fixed Rate Mortgage rates higher.
Many fear that a knee jerk rise in interest rates will both choke off the economic recovery and cause a correction downward in home prices, but clearly as everyone expects interest rates to rise, the MORE businesses and home owners that lock in their borrowing costs for years ahead, the less the economic and house price fallout will be. In my opinion.
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UK Interest/Mortgage Rates – WHO’S in control?
88 replies
Isitmebut · 25/01/2014 00:31
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