UK Interest/Mortgage Rates – WHO’S in control?

[Isitmebut]

The Bank of England on ‘forward guidance’ had indicated that interest rates (the Base Rate) was unlikely to go up from it’s 0.50% all time low UNTIL the UK unemployment rate fell to 7.0%, a level not expected until 2016 – so the fall in unemployment to 7.1% this month, is causing interest rate confusion, but who actually controls the interest rates that matter e.g. 2,3,& 5 - year fixed rate mortgages?

The short answer is NOT the Bank of England, it is the capital markets, as it is the buying and selling of the major institutional investors e.g. global pension funds, in global government bonds like UK Gilts, that determines the interest rates on every maturity EXCEPT the very short dated Base Rate, in the 2, 3,5,7,10 and 30-year bond issues.

So why does this matter to the likes of 2 to 5-year (and beyond) Fixed Rate Mortgages?

It matters as the government bond yield curve from 2 to 30-years ESTABLISHES THE FLOOR on bank lending rates, as banks can rarely borrow cheaper from the capital markets than the better quality/rated government to fund themselves, and lend money on to businesses and consumers.

My point being, is that with the best will in the world, the BoE does not control commercial interest rates, IT IS THE UK GOVERNMENTS CREDIT WORTHINESS (AND EXPECTED FUTURE INFLATION RATES) THAT DETERMINES our interest rates, as it is that market perception that means there are MORE buyers than sellers of UK Gilts, which brings interest rates down.

So will the BoE raise the Base rate from 0,50% anytime soon? It is highly unlikely, but in the February inflation report, they are likely to publish new guidelines, possibly based on other economic data than the traditional inflation and more recently targetted unemployment, reports.

What we have to remember is that the Base Rate in ‘normal’ times can be 2 to 4% OVER the UK inflation rate, now well below 3%, so once the BoE believes that UK economic conditions is anything like normal, the Base Rate and 2 to 30-year UK Gilts will (relatively) substantially move UP in yields (interest rates), in turn driving bank Fixed Rate Mortgage rates higher.

Many fear that a knee jerk rise in interest rates will both choke off the economic recovery and cause a correction downward in home prices, but clearly as everyone expects interest rates to rise, the MORE businesses and home owners that lock in their borrowing costs for years ahead, the less the economic and house price fallout will be. In my opinion.

[unrealhousewife]

Er no, not in other words actually, I just don't like your manner and won't engage with this kind of ranty discussion.

[Isitmebut]

If answering your badly researched answers IS "ranty" rather than you getting tired and emotional defending the indefensible, then so be it.


Back to interest rates; it was curious today that the release of the minutes of the BoE policy meeting last week, shows that when the nine members voted whether to raise the Base Rate this month, there was a 9-0 vote NOT to.

Usually when a rate move is imminent, the interest rate move 'hawks' and 'doves' causes a split vote, thus signaling that it would only take 1 or 2 members to shift position to raise, or lower the Base Rate in the months ahead.

Maybe as the very short end of the UK government bond yield curve is already starting to price in a higher Base Rate e.g. 2-year bond yields recently reached multi-year highs (resulting in say 2-year fixed rate mortgages, likely to become more expensive, if reflected in the inter bank rate market) - just the THREAT is already doing their higher interest rates/home price, financial tightening for them.

[unrealhousewife]

My answers are not badly researched I just don't write endlessly about my findings.

[unrealhousewife]

Tired and emotional. Ok...

[Isitmebut]

UK Nuclear Power (or lack of) I give you a relatively short summary and suggest that you look at the the link THAT DETAILS LABOUR's FAILINGS and mentions Tony Blair's 'drive for nuclear' policy and then you say it was Blair's clever 'tactics' to AVOID nuclear, and plunge the UK into 3rd world brown-outs. Oooooops.

I wondered quite how you'd recover your intellectual mojo after that embarrassment (and other answers blaming the Coalition for other Labour policy total cock ups), blaming me was your answer, may we move on?

[unrealhousewife]

I looked at the link and many more that you didn't prescribe and came up with another perspective. Was that wrong in your world?

[Isitmebut]

If the policies/events/speeches/white papers are recorded and therefore etched into history, it isn't so much a different 'perspective' - we can file that away under 'd' for 'DENIAL'. If you need the last word, be my guest, and rather than continue to highlight Labour's failings, we can then continue on with the subject of this post, views on homes, mortgages and interest rates.

[unrealhousewife]

Oh good grief, stop being so patronising and shouty. This is not a black and white issue. There are a lot of facts there is a lot of information and it does really depend on how you look at it. You have one interpretation that it's ALL LABOUR'S FAULT. Keep it if you like. My interpretation is that it is nobody's fault in particular as I said waaaaaay up thread. I am far more interested in how this has happened and what effect it is having.
What's your problem why can't you discuss on an equal footing with people, it's a shame really.

[unrealhousewife]

It's like playing tennis with a monkey.

[Isitmebut]

unrealhousewife ….. there was I being all nice and giving you the last word to extricate yourself with a final post dig at me and you had to have two - and the second one was just too upsetting for me NOT to reply. I can’t (and don’t care to) play tennis. lol

Look you are putting Labour’s failures down to non ‘black and white’ issues, and tell me that ‘it depends how you look at it’ – well surely the facts/results speak for themselves, UNLESS of course looking through red/rose tinted specs.

You said the National Debt/£157 bil annual budget overspend, was including continual bank bailout, I have both shown you are wrong and that the budget deficit is due to a massive increase in government spending from 2001 to 2008, and the tax receipts from the City/speculation, falling away after the financial crash from late 2007.

You said Labour spent most of the increased 2001 to 2008 government money wisely, I have shown you were wrong (just scratching the surface) and it was made worse by Private Finance Initiative debt spending on infrastructure, coming out of budgets for decades to come.

You said Labour’s failure not to build nuclear power stations when we had the money was some grand master plan, I have shown you that you were wrong, and as they take up to 10-years to build and the lights in the UK could go off from this winter on, their energy policy ending with Miliband (the last Energy Minister) was inept.

Yet you REITERATE in your last shots ‘you are interested in who’s fault it is’, but contradict yourself in saying ‘it’s nobodies fault’, a default position often used when someone from the ‘red’ team, who can’t pin any blame for their 13-year policies/record on the ’blue’ team, but refuses to acknowledge it.

Am I an angry person that Labour in 13-years, with so much money to spend and so many important social/infrastructure things to spend it on TOTALLY screw up, you bet - and that comes across as passionately as those blaming the Coalition for all sorts, who don't have the correct facts/balance.

But me taking the TIME & EFFORT to put my case to you in a debate on each subject, IS showing respect to you, or another poster wanting to debate, and is not “shouty” - but regarding “equal footing”, surely it depends on the quality of the counter facts put forward without the need for accusations and insults?

Pick a subject, any subject here, lose your sensitivity to facts you don’t want to hear, take the time to get your own factual ducks in order, and I’ll debate with you needing to accuse me of ‘shouting’, I promise. Well on this thread, I can’t guarantee my anger volume on other ones. lol

[unrealhousewife]

You were being 'all nice'? seriously you are very odd.

[Isitmebut]

Seriously, you're not wrong, nothing to debate there - I need to get a new life and I'm working on it.

[Isitmebut]

Just to carry on with my OP point that it is the MARKETS that will control both the timing and pace of the rise in interest rates that affect us e.g. Fixed Term Mortgage Rates, rather than the Bank of England’s Base Rate, as they start to ‘price in’ (better known as ‘discount’) good and bad news and expectations – the following link mentions both that Fixed Rates are moving up prior to and BoE move and why.

Summing up a few recent posts, IF there is a Base Rate rise this year, based on their Quarterly Meeting schedule IMO it is likely to be November, but this months 9 to zero Monetary Committees vote NOT to raise our Base rate in June, indicating there is not yet ONE interest rate hawk amongst the doves - historically this would lead market watchers NOT to believe a Base Rate move was likely any time soon.


(June 20 2014) “Interest rates: Cost of fixed-rate mortgages start to rise”

www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10914714/Interest-rates-Cost-of-fixed-rate-mortgages-start-to-rise.html
“The cost of fixed-rate mortgages has started to rise as lenders prepare for an interest rate hike later this year. Borrowers looking to fix their loan are being urged to act quickly to secure the best possible rates, as lenders replace their current range of deals with slightly higher rates.”

“The money markets, which ultimately determine the cost of mortgages and other household borrowing, have reacted to comments by Mark Carney, the Governor of the Bank of England, who has repeatedly hinted that rates could rise sooner than expected as concern grows over a bubble in house prices.”

“Swap rates – the rates at which banks and other institutions lend to each other – have edged up as a result, making it more expensive for lenders to access the money they in turn advance to home buyers. A number increased the cost of their fixed deals last week to account for the changes.”

“West Bromwich Building Society has increased some fixed rates by as much as 0.3 percentage points, while Newcastle Building Society increased its 95pc fixed rates by 0.2 percentage points. Platform, part of the Co-operative, has also pushed some fixed rates up.”