The lending community seems to be blushing even more given the lack of lender reaction accompanied by a number of hasty product withdrawals. And in deepest purple was the swap market where the sudden prospect of further increases in rate, not discounted by the market already, led to a significant kick in swap rates. Ultimately, this was the factor that caused a number of rate withdrawals leaving only those well hedged at previous levels able to sustain fixed-rate products. Even some of these will see the opportunity to use this funding to extend margins when the new rate regime becomes established.
Much of this concern lies in the fact that the MPC broke their recent quarterly increase cycle. The last three increases have all coincided with the release of the quarterly economic forecast updates and the market expected this to continue. Instead it appears that the MPC may have made the decision to increase as a rapid reaction to the startlingly good Christmas retail figures. As little as 10 days before Christmas, pundits were predicting the worst Christmas for 20 years. Instead bolstered by the new practice of late internet buying spending continued unabated. If this is correct it is deeply worrying on a number of fronts. Both the MPC and the consumer seem to have forgotten that increases in interest rate take a long time to pass through the system. The mortgage market is in some way responsible due to the growth in fixed-rate lending. Consumers, ever ready to take on even more debt, have forgotten that the cumulative impact of what is now a full 1 per cent increase in mortgage costs will increase their major expense – mortgage interest – by 20 per cent over the last year . And this impact will be exacerbated by the number exiting fixed rates from two years ago. The MPC is increasingly ignoring its original brief of controlling inflation, itself nowadays largely dominated by increasingly global factors, and rather focusing on short-term UK indicators before the true impact is felt.
What is therefore worrying the markets is that these two trends will continue and suddenly we are faced with the risk of not one but several further increases in base rate before the true impact on domestic spending comes through. When it happens will the MPC move rates down quickly enough to head off a mini recession? Past performance may be no guide here but I would bet they will not.
For the mortgage market, rate moves are always a good thing as they boost remortgage activity and January is certain to reflect this. In the longer term, the signs are not so good. Apart from the upper echelons of the housing market supported by City bonuses, affordability factors will start to bite further and transactions and price aspirations are likely to suffer. It will be even worse in the buy-to-let sector where already strained rental covers will leave investors wondering whether they want to put additional capital into transactions. And worse still arrears are almost guaranteed to increase leading lenders in some sectors to reappraise their credit policies. This may itself trigger a harder look by the FSA at TCF.
Mark Chilton is chief executive of Purely Mortgages.