Bank of England governor Mark Carney used his inflation report last week to shift the forward guidance goalposts.
Setting out his forward guidance policy in August, Carney said base rate would remain at its record low of 0.5 per cent until the UK rate of unemployment dropped to 7 per cent.
Six months on, the landscape looks markedly different. Unemployment has fallen from 7.8 per cent in August to 7.1 per cent in January, a far quicker fall than anyone forecast.
As a result, last week Carney chose to scrap the direct link with employment to focus a wider range of 18 measures, including wages, productivity and spare capacity in companies.
Carney said: “The bank rate may need to stay at low levels for some time to come. The first phase of guidance gave businesses confidence that bank rate would not be raised at least until jobs, incomes and spending were growing at sustainable rates.
“As guidance evolves, that remains the case: the monetary policy committee will not take risks with the recovery.”
The governor has also said the Bank will maintain its current quantitative easing programme untill the first rise in the base rate.
Brokers and economists say the clear impression from all this is that interest rates will remain at historic lows for the foreseeable future as the economy continues to recover.
GPS Economics director Gary Styles says: “It was always made clear by Carney that forward guidance would be flexed as and when required. He has stressed several times that nothing he does will derail the recovery, indicating that rates will remain low for the medium term.
“The Bank has kept the guidance very flexible and to a degree; fuzzy. With 18 different criteria to meet, it is very unclear at the moment as to when rates may increase but certainly he has given himself a lot of leverage room.”
Your Mortgage Decisions director Dominik Lipnicki says: “The fact Carney is willing to change his trigger points to consider a rate rise as the market changes is very much a positive. There is nothing worse than having someone in a position such as Bank governor who is inflexible to change.
“Had he not made these changes, everyone would be panicking at this stage about possible interest rate rises because of falling unemployment. When the original 7 percent trigger was set, it was expected to be a couple of years before that limit was reached.
“Now that the limit has practically been hit already, Carney has clearly eased the market’s fears by taking action.”
John Charcol senior technical manager Ray Boulger says: “Without question, the message is that rates are not going to rise any time soon. The Bank is trying to convince the market of that fact and using unemployment as a guideline clearly did not work as planned. So the switch to a broader range of criteria allows for greater flexibility when it comes to adjusting rates.
“The way I interpret this is that nothing much has changed. Carney has reiterated the point that rates are not going to rise until all parties feel the economy has recovered sufficiently and no longer needs the assistance of historically low rates.”
Despite the Bank’s move to reassure borrowers that rate hikes are not imminent, brokers believe other factors mean borrowers still should be considering fixed rate mortgages.
Lipnicki says: “Because of the withdrawal of Funding for Lending for mortgages and rising swaps rates, we are obviously seeing a slight increase in fixed rates. It is still time to fix – low interest rates are going to be in place for the next year at least but after that it gets harder to predict because of the range of benchmarks outlined by Carney.
“One of the key successes of this latest announcement is that the Bank has given itself a lot of options when it comes to assessing base rate.”
London & Country associate director of communications David Hollingworth says: “All that Carney has done is formalise what he has been saying for the last few months, that he will not rush to raise rates, despite the fall in unemployment.
“While it is useful borrowers do not need to panic about rates rising right now, they should maybe plan for when they eventually do. If I had a client approach me wanting a five-year fixed rate – I still believe in the medium term that represents good value. I do not see any need for borrowers to panic at this stage.”
Legal & General Mortgage Club director Jeremy Duncombe says borrowers should remain cautious about eventual high mortgage repayments.
He believes lenders will price in a change in base rate well in advance of any decision to increase and therefore current best buy rates are not going to be around for long.
Duncombe says: “The reality is a rate rise of just 0.5 percent could see the average mortgage bill increase by £750 per year. Five-year fixed rates have already begun to rise. The five-year swap rate, used to calculate the loans, hit 1.7 percent in January up from below 1 per cent last spring. This rise is a 65 percent jump in relative rates.
“Borrowers should therefore look at their options and talk to an advisor to tie down a more favourable deal while they still can.”