Face it: The credit crunch has now joined with inflation and low growth
Last updated 09:25, Friday, 29 August 2008
Sadly, I think this interpretation owes more to the need to fill newspaper columns than any meaningful analysis.
There are signs that the credit crunch may be easing slightly. Three-month LIBOR, the rate at which banks lend to each other and a key factor in the pricing of variable rate mortgages, has fallen by approximately 0.15 per cent since the beginning of July. As a result, there has been a slight reduction in the price of mortgages for new borrowers.
Money market ‘swap rates’ – one of the main factors affecting the price of fixed rate mortgages – have also declined following the Bank of England’s latest quarterly report which predicted that inflation would peak at five per cent in the autumn and return to its two per cent target within the next two years.
That said, Three-month LIBOR still sits approximately 0.75 per cent above the Bank of England base rate, when – in normal market conditions – the differential would be less than 0.10 per cent. And one year ‘swap rates’ are still around 5.60 per cent.
The harsh reality is that the credit crunch has merged into a period of relatively high inflation and low economic growth.
Even if the availability of funds continues to ease, we are still left with a difficult economic outlook driven by the rise in food, fuel and commodity prices and there is little the Government or the Bank of England can do to change that.
We simply need to adapt to different market conditions and let the impact of these sharp increases work their way through the system.
Inflation is too high for rate reductions and economic growth is too low for rate increases.
The Bank of England’s dilemma is best illustrated by minutes from the two previous meetings of the Monetary Policy Committee which showed a three-way split: one vote in favour of a rate reduction, one in favour of an increase and seven for the status quo.
Given the reasons for the current market conditions, changes in the Bank of England base rate are unlikely for the remainder of the year.
Expect current conditions to prevail well into 2009. It is likely that the rate of house price falls will slow, mortgage rates for new customers will start to ease and fixed term savings rates will fall back below six per cent.
But borrowers locked into variable rate deals shouldn’t expect further reductions in their monthly payments for the foreseeable future.
If your existing mortgage ends later this year, the market is becoming more competitive and you should certainly review your options at least two months before the end of your current rate.
If you prefer to arrange your mortgage through a broker, be aware that some lenders are still restricting their most competitive mortgage products to direct applications. Brokers will be aware of these products, but will need to refer you to the lender to make the application and will not receive a commission on the sale.
- Chris McDonald is head of marketing at the Cumberland Building Society. Visit the website at www.cumberland.co.uk
- Your home may be repossessed if you do not keep up repayments on your mortgage. This article should not be relied upon when making investment decisions. Always obtain financial advice.
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