Economists believe Mark Carney has “missed an opportunity” to grow the mortgage market by not being more specific on future interest rate rises.
The new Bank of England governor last week tried to offer borrowers a rough indication about when base rate would rise, stating the BofE would not consider increasing the benchmark rate until the UK’s unemployment rate falls below 7 per cent.
At present, unemployment is running at 7.8 per cent and it would take the creation of around 750,000 jobs for unemployment to fall below the threshold. The Bank forecasts unemployment wil not fall below the threshold until the third quarter of 2016 at the earliest.
However, Carney also included three “knock outs” to this rule. These caveats, which could see rates increase earlier, are; if it becomes likely CPI inflation 18 to 24 months ahead will be 0.5 per cent or more above the 2 per cent target; if medium-term inflation expectations no longer remain “well anchored” or if the financial policy committee judges monetary policy poses a threat to financial stability.
Economists argue Carney could have boosted consumer confidence by pinning the increase to a specific date, therefore encouraging them to take out mortgages and boost gross lending.
Capital Economics UK economist Samuel Tombs says: “Carney missed an opportunity to make it very clear to households that bank rate would be on hold for the next couple of years.
“He could have been clearer in getting that across and perhaps it will not be too effective in giving households the confidence to go out and borrow a bit more or make their next move on the housing market. Something more explicit would have been more effective in stimulating confidence.”
ING Direct UK economist James Knightley says most consumers have no idea what the rate of unemployment is at any one time, making it a irrelevant to most.
He says: “If Mark Carney had given a time target then it would have given households more confidence to go and borrow. But most people do not know what the unemployment rate is, so I think it is an ambiguous announcement and does not stimulate demand to borrow. So I do not think it is that big a help for the mortgage market.”
The concept of “forward guidance” had been trailed in the media before last week’s announcement. This was reflected by minimal movements in swap rates – which lenders use to hedge future interest rate rises and are closely linked to the price of fixed rate mortgages – on 7 August, the day of the announcement.
Two-year and 10-year swaps remained unchanged at 0.78 per cent and 2.61 per cent, respectively, while five-year swap rates increased by just three basis points to 1.59 per cent.
John Charcol senior technical manager Ray Boulger says this indicates we are unlikely to see any material change in the price of fixed rate mortgages in the short term.
He says: “The immediate conclusion one can draw is it is going to have very little impact on what rates lenders offer on their fixed rate mortgages, in the short term at least.”
However, a potentially extended period of low rates will be of great comfort to borrowers already struggling with their mortgage, especially if they are on a variable rate mortgage tied to base rate.
In July, the BoE warned that around one in 10 would struggle to afford their repayments if base rate increased by 1 per cent and it said this would increase to one in five if base increased by 2 per cent.
Industry consultant and former Council of Mortgage Lenders director general Michael Coogan says: “For borrowers who have got problems this is reassuring. Arrears and repossessions are not going to increase any time soon and lenders can work to keep, in the long-term, borrowers in their homes.”
Given borrowers have more certainty about central rates, it begs the question of what they should be thinking about doing now.
Boulger believes borrowers should still be looking at longer-term fixes, as rates are unlikely to get cheaper. He says: “The message for purchasers is that as fixed rates are in most cases at similar levels or cheaper than a tracker or discount, they should take a fixed rate but think about whether it should be for five or 10 years, not two or five years.”
Some brokers are warning borrowers not to hold back if they are looking to take out a fixed-rate mortgage, as unemployment could fall sooner than expected or inflation could rocket. Also, when the Funding for Lending scheme comes to an end in 2015, there is a possibility rates could go up if funding is still hard to come by.
Lentune Mortgage Consultancy director Stuart Gregory says: “Although I think there are many plus points to forward guidance it also has a danger of some people being convinced they do not have to do anything about their mortgage for the next two years, whereas in reality I think that is possibly the wrong move, especially with Funding for Lending coming to an end in 2015.”