Ray Boulger of John Charcol comments on today’s decision by the Monetary Policy Committee (MPC) to freeze Base Rate at 4.5%: "January rarely sees a Base Rate change, as more time is needed to properly assess the economic impact of Christmas, particularly in respect of the December retail sales figures. However, the surprise vote by MPC member Steve Nicol for a quarter point reduction at the December meeting has strengthened the likelihood of a rate cut in the very near future.
"Confidence in the property market is showing continuing signs of improvement and indications are that activity in the first half of 2006 will continue at the higher levels we returned to in the latter part of last year. Based on the average of the Halifax and Nationwide indices, house prices increased by 4.1% last year, in line with the increase in average earnings. The interest rate on variable rate mortgages fell by about 0.25% in 2005 and on fixed rates by approximately 1%. Therefore, taking all these factors into account there was a modest improvement in affordability over 2005. I expect to see at least two quarter point reductions in Base Rate this year and house prices to rise by about 5.5%. The housing market is a critical driver for the economy and, whilst a lower base rate is likely to be needed to improve consumer confidence, base rate at or a little below 4% should not cause overheating of the housing market."
When will Base Rate change?
"Traditionally, those months in which a BoE Quarterly Inflation report is due are much more likely to see a base rate change than other months and the next report is due in February. Inflationary pressures appear to be easing and consumers in general are clearly more reluctant to continue their credit card binge or to continue extracting equity from their property on a large scale. This has a significant effect on the level of consumer spending and a base rate cut to below 4% will be needed to restore spending to an equilibrium level. Banks have reported an increasing level of non-performing loans, where customers are failing to repay interest or capital as agreed, for the third successive quarter, and this is another indication that a lower base rate will be needed soon.
"Taking all this into consideration a cut in February or March to 4.25% seems very likely, followed by a drop to 4% mid year."
What should borrowers do now?
Boulger continues: "Despite increasing expectations of a base rate cut, the anticipated drop to 4.25% is not yet fully factored into swap rates, let alone the likelihood of at least one more cut later in the year. Therefore, I expect to see cheaper fixes later this month, and even lower rates later in the year. Borrowers who want to fix in the short term should hold out for another couple of weeks to see the lower swap rates we have seen over the last few weeks reflected in fixed rate pricing."
Please see accompanying table for product suggestions. Rates frequently change and so if you wish to quote any deals mentioned on the table please feel free to check with the press office to see if they are still available.
Borrowers keen to see how much they could save on their mortgage repayments should either contact John Charcol on 0800 71 81 91 or post a copy of their existing mortgage offer marked clearly "Remortgage Check" to John Charcol, Holbrook House, 10-12 Great Queen St, London, WC2B 5DD. This service is obligation free and consumers are in no way required to act upon the recommendations given.
BORROWERS SHOULD CONTACT 0800 71 81 91 OR VISIT www.johncharcol.co.uk
