“The debate at this month's MPC meeting was probably the most interesting for several months as the committee explored both old and new ways of stimulating the economy and whether such action was needed this month. Last month's increase from one to three members voting for an extra £25bn of QE was a significant change from David Miles' lone voice, as was Mervyn King’s decision to vote on what he knew was the losing side; as the Governor always votes last he was clearly trying to make a point. In fact, based on his outburst about RBS yesterday The Governor appears to be demob happy!
“When the minutes of this month’s meeting are published the voting spilt on whether to increase QE and whether a vote was needed on any other proposals should provide a clue on next month’s decision, as possibly will the budget.
“It was not just the closer vote on more QE that was notable in last month’s minutes but also the fact that the committee actually discussed cutting Bank Rate, before dismissing the idea for the same reasons as when it was considered last year. However, with Paul Tucker's comments to The Treasury Select Committee last week about negative interest rates, despite the fact that in his written submission to the committee he said that inflation was likely to remain above the 2% target “for the next few years," action of some sort from the committee to provide more stimulus looks probable in the near future.
“A cut in Bank Rate, even if we don’t actually get negative interest rates, must now be back on the agenda, as well as more QE. The main rationale for considering negative interest rates appears to be to encourage banks and building societies to increase lending on the basis it will make more sense to lend money and earn some interest rather than pay The Bank of England for the privilege of having money on deposit with it.
“A big problem with this is that after the regulatory failure in the run up to the credit crunch the various regulators, both supra national such as the Basle Committee and locally, i.e. currently the FSA, went from one extreme to the other and now require banks and building societies to hold far higher levels of liquidity, particularly for higher LTV lending as far as mortgages are concerned. A large proportion of these liquid assets effectively have to be held on deposit at the Bank of England.
“Thus on the one hand banks and building societies are required by regulators to hold substantial amounts on liquidity, which reduces their capacity to lend. Then to address this problem ideas such as negative interest rates surface. Rather ironic and perhaps it would be simpler to engage in a bit of joined up thinking!
“Plenty of outside the box thinking is undoubtedly currently exercising brains at The Bank and The Treasury, with incoming Governor, Mark Carney, apparently already having a strong influence. The interesting, but so far unanswered, question is whether Mark Carney was appointed because his views on managing the economy broadly coincided with George Osborne’s, or whether Mr Carney has reshaped The Chancellor’s policy.
What Should Borrowers Do Now?
“Over the last month fixed-rate mortgages have continued to get cheaper and tomorrow Abbey for Intermediaries is launching a 1.99% fixed rate to 2 November 2015 for LTVs up to 60%, with a £1,495 fee. This deal will only be available for seven days, i.e. until 14 March, and comes with a free valuation, plus on purchases a £250 cashback and on remortgages free legal fees. A 2½ year deal is unusual but the extra 6 months it offers over the more common 2 year deals, at a rate only slightly higher than the cheapest 2 year fix, combined with the freebies, makes this an excellent value mortgage for those looking for a short-term deal. It is encouraging to see that Santander is also engaged in some out of the box thinking!”
