Mortgage experts have warned against expecting too much from the dip in inflation forecast by Bank of England governor Mark Carney last week.
In the February inflation report, Carney said inflation is set to fall into negative territory this spring before returning to zero over the third and fourth quarters of the year.
While Carney has been keen to stress the likely short-term nature of any reduction in inflation, he has also emphasised the positive impact on the wallets of UK households, not least thanks to tumbling oil prices.
He said: “The combination of rising wages and falling energy and food prices will help household finances and boost the growth of real take-home pay this year to its fastest rate in a decade. This will support solid growth in consumer spending.”
Intermediary Mortgage Lenders’ Association executive director Peter Williams says mortgage brokers should welcome a short-term improvement in their clients’ earnings.
Williams says: “Eighteen months is a particularly short time in the life of a mortgage, so a pause is something that most people would welcome. If people’s costs are not rising then they have more spending income. We see everything in terms of what happens in terms of wages, and this can only help.”
But Association of Mortgage Intermediaries chief executive Rob Sinclair warns against extrapolating too much from the Bank figures.
“There is the risk of deflation being driven by an oil price dip that is unlikely to be permanent,” he says.
“This is about a large component of the [Consumer Prices Index] number moving because of an impact on international markets. It’s not the UK that is causing this, so we shouldn’t overreact to it. If oil prices start to go back up, the numbers will look very different very quickly.”
Sinclair adds: “It’s a storm in a teacup. I don’t think we are hearing anything new that will impact very much on mortgages in the next three to six months.”
A Council of Mortgage Lenders spokeswoman agreed: “There’s enough economic uncertainty to balance against people getting too excited because they have more money in their pocket.”
Carney says the Bank is willing to use any means necessary to return inflation to its 2 per cent target, leading some to speculate that further reductions in interest rates could follow if a short stint of negative inflation gives way to longer-term deflation.
“The Monetary Policy Committee stands ready to take whatever action is needed, as events unfold, to ensure inflation remains likely to return to target in a timely fashion,” Carney said.
The comments sparked speculation that the MPC could cut the base rate to below the present, record low of 0.5 per cent.
However, Sinclair says a fresh round of cash printing represents a more likely option for the Bank.
“At 0.5 per cent, you can only go to 0.25 per cent or 0 per cent, and that would send a signal to the wider world that things are worse in the UK than anyone might think. Quantitative easing is much more likely than a rate cut.”
Carney maintained that “limited” Bank rate increases implemented at a gradual pace remain probable.
“It’s pretty clear in terms of our central expectation that the most likely next move in monetary policy is an increase in interest rates,” he said.
Williams warns a move towards raising interest rates while real-terms increases in salary are still nascent would also present challenges for consumers.
Figures from the Office for National Statistics indicated in January that average earnings rose 1 per cent between September and November – the second consecutive period in which the ONS recorded above-inflation increases.
The previous figures represented the first time wages had beaten inflation in six years.
“If they are going to raise interest rates, it will push pressure back on people, particularly if wages aren’t still rising,” says Williams. As a result, the medium term forecast remains one of gradual base rate increases over the next two years.
Capital Economics property economist Matthew Pointon believes rates may inch up through the next 22 months. He forecasts a base rate of 1.25 per cent by the end of 2016.
The next opportunity for the Bank of England to change interest rates will be when the Monetary Policy Committee meets over two days in early March.
Regardless, Pointon warns that expectations are sufficiently poor to keep mortgage rates suppressed in the meantime, not least because low levels of applications are generating vicious competition.
Bank figures show that average two-year fixed mortgage rates are at record lows, while numbers of mortgage applications also remain down.
Approvals for purchases averaged 60,000 a month in Q4, below Bank predictions, while the latest forecast suggests approvals will remain flat through Q1.
“We have already seen that interest rate expectations have moved far into the future and that has fed through to rates, which were trending up and are now coming back down,” Pointon says.
“Mortgage rates will likely stay low and could fall even further.”