Inflation forecast hits cheaper loans
Hopes of imminent cuts in new mortgage rates were dashed yesterday as the Bank of England’s inflation judgment sent money market interest rates soaring for a second successive day.
Three-month sterling Libor, the benchmark rate used to price many loans, soared by 0.04 percentage points to 5.84 per cent, bringing the rise to 0.08 percentage points in just two days and wiping out most of the improvement of the previous three weeks.
Homebuyers and borrowers looking to remortgage were warned to brace themselves for a worsening of mortgage terms because of the sea change in expectations about base rate over the next year. The average rate for a two-year loan reached 6.64 per cent yesterday – the highest rate since 2000, according to Moneyfacts.
Until Wednesday, Libor had been falling almost daily for three weeks as traders priced in further cuts in base rate this year and took heart from the Bank’s £50 billion liquidity injection – which is now likely to rise by as much as £40 billion. It emerged last night that the UK’s biggest banks are now preparing to swap as much as £90 billion of mortgage-backed assets for Treasury bills with the Bank.
Libor’s three-week fall ended after the Bank said in its Inflation Report that inflation would rise far more than it had previously expected, so dashing hopes of any imminent base rate cut.
David Hollingworth, of London & Country, the mortgage broker, said: “The mortgage market has effectively gone back in time by one month in one day. The Libor move is disappointing because it had been coming down. For this trend to be reversing already is not a good sign. This is not going to help lenders’ funding issues, so we could see rates starting to edge up again.”
Two-year swap rates, a key benchmark for fixed-rate mortgages, have leapt from 5.27 per cent to 5.63 per cent in the space of a week.
Darren Cook, of Moneyfacts, said: “We’ll see a bit of a lag and then fixed-rate mortgage rates are going to go up again.”
Since the last base rate cut of a quarter point – on April 10 – 53 per cent of lenders have either failed to cut loan costs at all or failed to pass on the full benefit to borrowers on standard variable rates, Moneyfacts says. Banks had been starting to inch new lending rates downward, with Nationwide Building Society cutting the rate on a two-year fix from 6.1 per cent to 5.95 per cent. However, it gave warning yesterday that once funding for that tranche of mortgage money ran out, it would have to review rates again in the light of the change in Libor.
Abbey yesterday reduced the rates on its tracker mortgages and some fixed-rate deals by a token 0.05 per cent in anticipation, the lender said, of Libor falling, but it refused to rule out reversing the cuts if Libor did not decline.
Economists have altered forecasts for base rate significantly in the wake of the Inflation Report. Royal Bank of Scotland, which previously predicted a quarter-point cut to 4.75 per cent by year end, said it now expected base rate to stay at 5 per cent into 2009. Capital Economics, an arch dove, said base rate would fall only to 4.5 per cent by the year end, rather than the 4 per cent it had previously forecast.
Source: Timesonline