Bank of England

After the news broke that the US Federal Reserve have increased the central bank’s core interest rate this week from 0.25% to a range of 0.5-0.75%, observers may have been tempted to predict that the Bank of England (BOE) would follow suit. The move by the Fed, only the second raise in the central bank rate over the past 10 years, would historically provoke a reaction across the world’s major economic powers to review rates.

However, times have changed post-Brexit, and while the Fed has implemented the raise in reaction to signs of recent domestic economic growth, the forecast for the UK economy is increasingly becoming a vision of diminished advancement in terms of growth. The Bank of England chose to cut interest rates in the preceding months of the Referendum result and at this stage the move has neither weakened or improved economic growth to a discernible degree. As such, it is not a surprise that the Bank of England have decided to hold the base rate at 0.25% today.

So what are the factors that may have led to this decision?

Despite consistent assurances from the Government that a “clean” exit from the EU will be possible, the markets are likely to react to the news that Sir Ivan Rogers, Britain’s ambassador to the EU, has reportedly warned No 10 that any efforts to strike a new trade deal with the rest of Europe could take 10 years to cement.

Fears abound that even after this extensive period a deal may still not be possible. The revelation is likely to cause further fluctuations in the power of the pound over the coming months and will not be helped by the news that the House of Lords EU financial affairs sub-committee will today, warn that major players in the financial services industry could choose to exit premises in London, in-favour of New York, Paris, Dublin or Frankfurt.

This will increase the pressure on Theresa May to present a positive outlook for negotiations, with February 2017 earmarked as the earliest point that the Government will be able to present its plans to strike a deal with the remaining EU states.

UK property values have followed the six-year trend of prices reducing by circa 2% over November, matching market expectations. Buyer activity has strengthened, with sales up by 5.2% when compared to the same month in 2015. London prices are expected to continue to evidence little increase in 2017, with the balance between minimal wage rises and ever-increasing property values tilted unevenly.

Market experts are citing this as the fundamental preventative for a stronger market in the capital, while predictions for a modest 3% increase in values for properties outside London are gathering pace.

Concerns that the mortgage market would be impacted by the UK’s decision to exit the EU have not yet born fruit, as the number of new mortgage options has increased over the past 6 months, with the level of interest rates decreasing across all product lines. A study by the consumer website Which? has confirmed that homeowners could pick from 5,336 mortgages in September, when compared to 4,736 in June.

While this bodes well for the chances of the UK base rate continuing to remain static over the coming months, borrowers considering longer term fixed options should note that the cost of 5-10 year fixed rates may begin to rise early next year.

Swap rates, the prices used by lenders to negotiate for fixed rates in the City, have considerably risen since Donald Trump’s race to the White House was won. So, while the Fed’s move to change the central bank rate may not affect the cost of borrowing in the UK, Trump’s bid to double the growth of the US economy could impact the prices set by UK lenders for competitive products in 2017. 

Article by: Simon Butler, Associate Director at Contractor Mortgages Made Easy

Media Contact: Sarah Middleton, Public Relations Manager

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