Boulger says: "The various economic statistics released over the last month have been mixed and consequently have done little to advance the arguments of either the doves or the sole hawk on the MPC.
"Two of the most watched housing indices, those from Nationwide and Halifax, have come much closer into line over the last two months after diverging sharply in the first half of this year. In the first eight months of this year the real, i.e. not seasonally adjusted, Nationwide index is up by 2.9% and the Halifax index is up by 1.0%.
"After seeing little movement the previous month gilt yields and swap rates have fallen sharply over the last month, particularly at the longer end. Furthermore the 3-month Libor rate has edged lower. Both these movements reflect the market's increased confidence that Bank Rate will remain at 0.5% for longer than previously expected and that when it rises the increases will only come slowly."
What does this mean for mortgages?
"There has been an increased take up of fixed rate mortgages over the last few months but most of the competition from lenders in fixed rates over the last month has focused on the 2-year period, resulting in much more choice in the sub 3% 2-year fixed rate market.
"In particular, Godiva has just launched a fixed rate to 31/12/12 at 2.49% up to 60% LTV with a fee of 1.5% + £199, a free valuation and on remortgages free legal fees.
"However, despite 5-year swap rates having fallen by 0.22% to 2.15% over the last month, compared to a smaller fall of 0.09% to 1.31% in 2-year swaps, there has been relatively little action in the 5-year market, although Accord is now offering a 4.99% fixed rate to 31/10/15 up to 75% LTV with a £1,995 fee. It is worth noting that a large fee amortized over a 5-year fixed rate has much less of an impact on the effective rate than the same fee on a 2-year fix."
CHICKEN AND EGG
"Admittedly other factors as well as swap rates influence mortgage pricing but the chicken and egg concept seems to be relevant here.
"Lenders are focusing more on being competitive in the shorter term fixed rate market, widening the gap between 2 and 5-year fixed rate pricing, despite the swap rate differential narrowing.
"This results in more borrowers choosing a 2-year fix because of the widening interest rate differential. Lenders who want to be competitive then focus more on the 2-year market because that is where an increasing proportion of demand is!
"Maybe lenders' much greater reliance on the savings market is a factor here, as banks and building societies try to match their borrowing and lending terms and most savers aren't prepared to tie their money up for five years."
