Interest rates continued their slow but steady decent during the week ended December 31 according to results of the Primary Mortgage Market Survey released by Freddie Mac Wednesday morning. The 30-year fixed-rate mortgage (FRM) hit yet another historic…(read more)
Original post by Jann Swanson
Millions of Americans are being sandbagged yet again by consequences arising from the banking crisis. For the last six months or so, lenders have been wrecking havoc on many of their customers by reducing credit limits , increasing prevailing interest…(read more)
Original post by Jann Swanson
Federal Reserve chairman Ben Bernanke said that economic activity has downshifted further and the policy response must be vigorous. He said cutting the Fed funds target rate below 1% is "certainly feasible", but broader action could be more…(read more)
Original post by Mortgage News Daily
What Will Happen to Mortgage Rates?
After the Bank of England’s decision to cut interest rates by 1.5%, there was a predictable scrutiny of the high street banks to see whether they would pass the cut on to consumers.
Interestingly, one of the first banks to announce they would pass the cut on was Lloyds TSB and its mortgage subsidiary Cheltenham & Gloucester. The other part nationalised banks, Halifax, (HBOS) and Royal Bank of Scotland have all stated they intend to pass the cuts on. The only two to avoid trimming their rates so far are HSBC and Barclays (both of whom avoided requiring government funds)
However, even if banks do cut their standard variable rate by 1.5% there is no guarantee that all mortgages will be cheaper. In the boom years, anyone with any sense would remortgage to a better mortgage deal. To stay on your mortgage lenders standard variable rate was an expensive mistake to make. What will happen now is that banks will reduce the number of offers and special mortgage deals. The days of tracker mortgages 1% below the base rate are over. It will be harder for people negotiating a new mortgage contract to get a deal which offers any discount on the standard variable rate. For example, the Abbey, Halifax and Nationwide have all been increasing their tracker rates to new customers. The number of tracker mortages on offer has also nearly halved. Therefore, although the banks standard variable rates will be falling, many will not see the equivalent reduction in mortgage payments they might expect.
The libor rate is the rate at which banks borrow from each other. This is very important for determining the rate at which commercial banks want to lend. The good news is that this has come down. On Friday the Libor interbank rate fell 1.07% to 4.5% the biggest fall since 1992; suggesting an easing in lending conditions and making it more practical for banks to cut their own rates.
As many have pointed out the problem with the credit crunch is that banks don’t want to lend because they are desperately trying to improve their balance sheets. Therefore, although loans may appear cheaper, banks will not be in a rush to lend. With property prices falling, banks will be requiring large deposits to protect themselves against negative equity. Therefore, although mortgages may look cheaper, many first time buyers may still be unable to get a mortgage - even if they would like to get one. - Reducing the cost of borrowing is not really the problem; the problem is a shortage of funds, liquidity and confidence for lending.
Even people on tracker mortgages may not necessarily find themselves with lower rates. This is because some tracker mortgages have what is known as a collar clause. What this means is that your rate follows the base rate upto a certain point. But, if base rates fall below 3%, the bank does not have to pass the lower rates on. (At the same time, these collar mortgages also often have an upper rate as well.)
The outlook for medium term interest rates is for them to fall and remain low. Although interest rates have been cut to 3%, many analysts suggest rates could fall to 2% or even 1%. This is because so far, the recession has been much steeper and deeper than expected. Unemployment is rising sharply. Output is falling across different sectors from manufacturing to retail. The housing market continues to drag the economy down.
Inflation is widely forecast to fall sharply from 5% to 2%, some in the MPC now fear that inflation could drop below the government’s target of 1% - raising the ugly prospect of deflation. The bank will certainly be keen to avoid this.
Original post by Tejvan R Pettinger
Interest rates have become the main tool for influencing the Economy in both the UK and US. Interest rates have a significant impact on all aspects of the economy including:
The future direction of interest rates, primarily depends upon forecasts for inflation and economic growth. In the UK, the Monetary Policy Committee have been given an inflation target of 2% +/-1. Thus, if the MPC feel inflation is likely to rise above this target, they will be obliged to increase interest rates in order to moderate demand in the economy. Thus, predictions for interest rates often depend upon predictions for inflation.
At the moment the MPC are verging on the side of caution.
Why Interest Rates may not Fall in 2008 /09
The economy is slowed down much more than the MPC expected, therefore, the chance of substantial interest rate cuts has increased. The slowing economy will help reduce inflation, giving the MPC the ability to cut rates and try and prevent a severe recession.
The government will also be hoping that interest rate cuts may help the beleagured banking sector and avoid more bailouts such as Northern Rock, Bradford & Bingley and HBOS. The government has already taken on mortgage securities of £150bn it will want to avoid future bailouts if at all possible.
No, at least, not directly. The MPC is concerned only with an inflation target it does not have an exchange rate target. Therefore, it will not cut interest rates to reduce the value of sterling.
Also, the £ is primarily strong against the dollar, due to the weaknesses of the dollar.
Related Posts
[1] Forecast for UK economy 2007 PDF document
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Original post by Tejvan R Pettinger
Readers Question: How Does MPC set interest rates.
Yesterday, the nine members of the MPC voted to keep base interest rates unchanged at 5%. What explains their decisions to change rates?
The MPC have an inflation target of CPI 2% +/- 1 set by the Government. Therefore, predictions of future inflation are the most important factor in determining interest rates.
To predict inflation trends they can look at several things.
At the moment, the MPC is being pulled in two ways. Inflation is increasing because of rising oil prices. But, the economy is slowing down because of the credit crunch and falling prices. They have weighed the two up and decided to just leave things as they are. They probably hope that the slowing economy will reduce inflation in the future and therefore they may be able to cut rates later in the year.
However, it is interesting that the MPC have a target only for inflation. The Fed reserve have a target for both low inflation and higher growth. Some argue the MPC focus too much on inflation and actually should be cutting rates to avoid the real prospect of recession.
See also: Interest rates explained
Original post by Tejvan R Pettinger
As expected, the Bank of England cut the base rate by 25 basis points to 5.25%. This cut had been widely expected, and the only question was whether it would be a cut of 25 points or 50 points.
Despite the rate cut, there may not be too many more cuts this year. The Bank point to the fact that the economy is still expanding, there is only a relatively minor fall in consumer confidence. Furthermore, inflationary pressures are not completely subdued. Rising energy prices and food prices are pushing up cost push inflation.
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Original post by Tejvan R Pettinger
Amidst all the gloom surrounding the UK housing market it is worth putting current difficulties into a historical perspective.
Graph Showing Mortgage Interest Rates in UK
In 2008, Interest Rates are currently at 5.5% and most predictions are for UK interest rates to fall.
The lowest interest rates in the UK were reached a couple of years ago when the base rate fell to 3.5%, since then the MPC have increased interest rates because of the improved UK growth. (The strong performance of the UK economy is illustrated by the significant fall in unemployment.) (more…)
Original post by Tejvan R Pettinger
A few months back I looked at the prospects for interest rates in the UK. Since then market conditions have increased the likelyhood of lower rates - With some commentators suggesting that base rates could fall to 4%. Whilst a 1.5% fall would represent a significant loosening of monetary policy, the prediction is based on recent signs of weakness in the economy and, particularly, in the housing market.
Mortgage Approvals falls by 40%.
Recent evidence from the British Bankers Association (BBA) shows that mortgage approvals is 40% down on this time last year (44,831 in November). This shows the nervousness of banks in lending and also people’s reluctance to take out mortgages against prospects of falling UK house Prices.
House Price Falling
There are different measures of house price inflation in the UK. However, they all seem to be converging on a new trend for lower house prices. Data from November, by the Nationwide show that house prices fell by 0.5% - this has caused the annual house price inflation to fall to 4.8%. Falling house prices will almost certainly reduce consumer confidence and consumer spending. (link - house price fall at telegraph)
Original post by Tejvan R Pettinger
With growing signs of falling UK consumer confidence, the Bank moved to cut interest rates by 0.25% from 5.75% to 5.5%. However, it is uncertain whether the interest rate cut will actually be passed onto homeowners. Due to the credit crunch, there is a real problem of a shortage of funds for mortgages. For example, Standard Life recently increased its standard variable rate, independently of the Bank of England’s base rate.
If banks do pass on the base rate cut to consumers it could see the cost of a £150,000 mortgage fall by £24 a month.
However, with house prices falling for the third month in succession, there are hopes and predictions that interest rates will continue to fall in 2008. (interest rate predictions 2008)
As long as inflation does not rise (due to say rising oil prices) the weakening of the retail sector should leave scope for interest rate cuts in the new year.
Interest rate cuts may also lead to a weaker value of the Pound in 2008.
Original post by Tejvan R Pettinger