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Green shoots strangled by inflationary weeds

UK gilt yields have continued to rise this week as more lenders prepare to increase their fixed rate mortgages.
Yesterday, Nationwide was one of the first to up its rates on prime fixed rate deals. How long before the days of low-fixed deals are over?

Gilt yields, which in turn affect the swap rates that define lending costs, have risen dramatically in the last few weeks, with five-year gilt yields up nearly 60bps in just a week.

Advisers have been urging borrowers to drag themselves away from their low rate variable or trackers deals and lock into a historically low fixed rate deal before it’s too late. Has the tide finally turned?

The Mortgage Practitioner principle Danny Lovey thinks so. He says: “The trend is the yield curve getting steeper and the price going down. No one knows how long that will last, but it is unlike it will change in the medium term.”

John Charcol senior technical manager Ray Boulger also agrees, saying: “Most other lenders will be announcing increases in the cost of their fixed rate mortgages in the very near future.

“The market is coming round to the view that the economy is going to bounce back from the recession more quickly than was expected until recently. However, if rates rise too far too quickly there is a very real danger that whatever green shoots may be appearing will be strangled at birth.”

Some critics may argue that these rate rises may just be further evidence of hoarding banks.

Henderson New Star’s chief economist Simon Ward doesn’t think so. He says broad money supply figures prove that deposits aren’t giving the banks the margins they need: “In November 2007, the average interest rate on broad money deposits stood at 4.6 per cent, 115bps below the Bank rate of 5.75 per cent. By April 2009, it was 110 basis points higher, 160bps above the 0.5 per cent rate.

“Far from bolstering their profits at the expense of hard-pressed borrowers, banks have actually suffered a further decline in their net interest margin over this period.”

Lovey says Ward’s findings prove that the system is still sick; money is going in but it is not coming out: “Libor is as low as it has been for some time, which normally points to more liquidity in the market. But is that the case now? We just don’t know because we don’t know what’s normal anymore.”

So will imminent fixed rate rises kill off any hope of a house price bounce? Will this extinguish the flickers of hope that have been spreading through the market? Or is this one of many bounces and blips that we will experience as our economy bottoms out? Let me know what you think.

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