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Inflation Reports and Mortgage Rates

By on November 14, 2013

At first sight yesterday’s Quarterly Inflation Report from the Bank of England might suggest Bank Rate will start rising earlier than previously expected. However, the best guide to whether the report has changed market perceptions is to look at gilts and most gilts closed virtually unchanged.

Therefore, although the Quarterly Inflation Report indicates the Bank of England sees unemployment falling to 7% earlier than when its Guidance was introduced 3 months ago, in fact 5 quarter’s earlier, the market never believed the original forecast and had already come to this conclusion, which explains why gilt yields are higher today than 3 months ago.

As far as mortgage rates are concerned there is therefore absolutely no reason to expect any rate increases (or decreases) specifically as a result of this inflation report. What will drive mortgage rates tomorrow are the same factors as were relevant yesterday.

It was widely reported that Mark Carney, the Governor of the Bank of England, said Bank statisticians foresee a 40% chance unemployment will reach the 7% threshold by the end of next year, with a 60% chance it will happen by the end of 2015. Translated this of course means the Bank thinks there is a 60% chance the trigger point won’t be reached next year and its central estimate is that unemployment will hit 7% around the middle of 2015, i.e. just about the time of the General Election.


Whilst the MPC is independent, Mark Carney was chosen by The Chancellor and it is pretty clear the two are on the same page when it comes to considering the right time for an increase in Bank Rate!

Furthermore Mr. Carney, and others at The Bank, have recently highlighted on several occasions the fact that just because unemployment has fallen below 7% it doesn’t automatically follow that Bank Rate will be increased. He said: “The unemployment threshold is a staging post for assessing policy and not a trigger for automatic increases in interest rates. When the threshold is reached the MPC will set the policy to balance the outlook for inflation against the need to provide continued support to the recovery in output and employment. With the recovery taking hold, our task now is to secure it.”

At yesterday’s Inflation Report Press Conference Mark Carney also said: “We make policy for the whole of the UK and not just for within the Circle Line.“ In this respect the MPC’s task of setting the right level for Bank Rate is a microcosm of the ECB’s problem of setting one rate for the whole of the Eurozone. It is, however, very easy for anyone based in London to forget that although the increase in house prices is now rippling out from London to most of the country, there are few places outside London where prices have recovered to the level of 6 years.

As we get closer to the likely date of the first increase in Bank Rate gilt yields, swap rates and the cost of fixed rate mortgages will start to rise but the scale of that increase will depend on how quickly the market expects rates to rise. The timing of mortgage rate increases is debatable but what is clear is the scope for rate falls is negligible, except at the high LTV end of the market as a result of a major increase in competition following the introduction of Help to Buy 2, with the non Help to Buy lenders currently making the running.

Thank you to Elliot Nathan of John Charcol for the content!

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