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Bank of England holds base rate at 0.1% and warns of sharp recession

The Bank of England has held its base rate at 0.1% but warned it expects a sharp recession in the first half of the year as a result of the coronavirus restrictions.

In its May monetary policy report, the bank noted that the spread of Covid-19 and the measures to contain it were having a significant impact on the United Kingdom and many countries.

“Activity has fallen sharply since the beginning of the year and unemployment has risen markedly. Economic data have continued to be consistent with a sudden and very marked drop in global activity,” it stated.

However, the Bank of England also highlighted that there were some “tentative signs of recovery” in countries that were starting to relax restrictions and that financial markets had recovered in part.

And indicators of UK demand have generally stabilised, albeit at very low levels, in recent weeks after “unprecedented falls” during late March and early April.

Banking stability

The central bank believes the core banking system has “more than sufficient” capital to absorb expected losses and that there will be capacity to provide credit to support the UK economy.

In its scenario, it is anticipating that overall economic activity (GDP) will fall 14% in 2020 but rebound by a similar amount in 2021, although it will not reach its pre-coronavirus size until the middle of next year.

Household spending is expected to follow a similar pattern to GDP, but consumer savings is anticipated to rise sharply this year but then fall back in the next two years.

This will have an impact on inflation, as will falls in oil prices, with inflation potentially hitting 0.6% over 2020 as a whole and reaching zero at the end of the year.

Unemployment is predicted to double to around 8% in 2020 but return to around the pre-coronavirus position in 2022.

The scenario also assumes the UK will complete an orderly free trade agreement with the European Union at the end of the year, however this is not certain and disagreements during negotiations have been public from both sides so far.

Kevin Brown, savings specialist at Scottish Friendly, said: “The Bank of England’s report on the economy makes for bleak reading, but it is still holding out hope for a reversal of much of the economic misfortune the country is suffering thanks to coronavirus, by the middle of next year.

“Markets have largely responded to the crisis already and much of this fresh economic data is already priced in. It is impossible to predict a bottom, but one thing’s for sure, savers won’t find succour in a savings account paying 0.5% interest.

“It’s a tough time for savers out there and many are being caught out by the speed at which rates on cash accounts are changing. The signals given out by the Bank of England suggest the base rate is going nowhere and this should be a catalyst to anyone with a savings pot to make sure they’re getting the best out of it, by considering ways to maximise their potential returns.

“Many high street banks, building societies and challenger banks are cutting rates but there can still be ways to generate above inflation returns by exploring alternatives such as regular savings accounts, longer fixed-rate ISAs and stocks and shares.”

Written by: Owain Thomas

Source: Your Money

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Bank of England Slashes Interest Rates to Bolster Economy During Pandemic

The Bank of England has announced an emergency cut to interest rates in an effort to limit the economic impact of the coronavirus pandemic.

In its first emergency meeting since the 2008 financial crisis, the monetary policy committee voted unanimously on Tuesday to slash the base rate from 0.75% to 0.25%.

The Bank said the cut was in response to the “economic shock” of the COVID-19 outbreak and would “help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.”

Mark Carney, outgoing governor of the Bank, said the economic damage of the virus wasn’t clear yet but suggested the UK economy could shrink in the coming months. Policymakers had already witnessed a “sharp fall in trading conditions,” including in spending on non-essential goods, he said. Other nations are experiencing similar slowdowns and the Chinese economy, the world’s second-largest, is forecast to contract in the first quarter.

However, he said the downturn wouldn’t be as severe as the recession which strangled the UK economy in 2008-09. “There is no reason for it to be as bad as 2008 if we act as we have, and if there is that targeted support.”

The cut was announced on Wednesday, in tandem with Chancellor Rishi Sunak’s budget, which included billions of pounds of measures to support the economy during an extended outbreak of the virus.

The steps were coordinated to have “maximum impact,” Carney said.

The cut takes interest rates back to their lowest level in the Bank’s 325-year-history. Rates were previously cut to 0.25% in August 2016 and subsequently raised in increments in November 2017 and August 2018.

The cut will reduce savers’ yields but benefit some homeowners and those looking to remortgage or purchase a new property. The approximately 10% of homeowners with tracker mortgages will see their monthly repayments fall quickly. Lenders are also expected to respond to their lower borrowing costs—and to tumbling swap rates—by slashing mortgage rates.

When the base rate was last 0.25%, some banks offered two-year fixed-rate mortgages for less than 1%, although borrowers needed a large deposit to qualify. Currently, the best two-year fixes are from NatWest (1.19%) and Barclays (1.21%) but better offers will surely follow.

Mark Harris, chief executive of the mortgage broker SPF Private Clients, said: “This is a bold and decisive move from the Bank of England. Swap rates have tumbled in recent days and both the reduction in base rate, plus lower swap rates, will lead to even cheaper mortgage products.”

Consumers can expect already melting savings rates to fall even further and the best deals to be withdrawn from the market. Customers using savings accounts at high-street banks are already reaping historically low interest rates—usually of below 0.5%—leaving banks with little room to trim them further. But while rates on mainstream accounts are unlikely to dip into the negatives, as they have on some accounts in Denmark and Switzerland, they could flatline at 0%.

Source: Money Expert

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Bank of England cuts base rate back to 0.25% due to coronavirus

The Bank of England has made an emergency base rate cut of 0.50% to deal with the economic shock caused by the coronavirus outbreak.

This brings the interest rate from 0.75% to 0.25%.

The Bank’s Monetary Policy Committee was due to meet on March 26, but met yesterday at a special meeting to unanimously make the decision.

Tracker and variable mortgage rates may fall as a result, though it’s unclear whether they will all fall by 0.50% owing to the ’emergency’ nature of the cut.

Fixed rates may also see some reductions in the next few weeks.

This is the first cut in the base rate since 2016, when it fell from 0.50% to 0.25%.

BY RYAN BEMBRIDGE

Source: Property Wire

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68% of brokers think Base Rate had no impact on their businesses

More than two thirds (68%) believe that the two Bank of England Base Rate increases seen since November 2017 had no impact on their business, United Trust Bank’s broker sentiment survey has found.

The Base Rate currently stands at 0.75% following an increase from 0.50% on 2 of August this year.  The rate was increased from 0.25% to 0.50% on the 2nd of November 2017.

Some 16% of brokers felt the two increases had had a positive impact on their businesses as opposed to 16% who felt they had had a negative impact.

Harley Kagan, group managing director – United Trust Bank, said: “It is encouraging to see that for a majority of brokers the two Base Rate increases have had little to no impact on their businesses over the last 12 months.

“I believe the same is broadly true from a lender perspective although expectations of higher mortgage rates to come may have been a contributing factor to a general cooling of activity in the residential property market.

“Developers and housebuilders need to be mindful of future demand and pressure on pricing when planning future projects and that, coupled with Brexit uncertainty, is causing some to take their foot off the gas with new starts.

“The Base Rate has been less than 1.0% for the best part of 10 years. Originally a measure to stave off the worst effects of the financial crisis, for many, and especially the latest generation of consumers and borrowers, ultra-low interest rates are now the norm.”

Kagan added: “As such it doesn’t take much of an increase to inject some nervousness into the market, especially for first-time buyers.

“However, a return to the interest rates seen before the credit crunch seems unlikely. Whilst a 5% Base Rate appeared reasonable in 2008, the PRA recently challenged the resilience of banks and other lenders using a 4% Base Rate for stress testing, an indication perhaps of what they believe would be an extraordinary interest rate for the current economic environment.

“Hopefully, once the nature of our future relationship with the EU is clearer and uncertainty in the economy is replaced with stability, buyers will be back in even greater numbers and housebuilders will be more encouraged to get on with tackling the UK’s inherent housing shortage.”

However, when asked what impact the increases have had on the UK’s residential property market over the last 12 months, 27% believed the effect had been negative.

Nearly half (46%) expected one more increase of 0.25% between now and the end of 2019, taking the Base Rate to 1.0%, while 12% expected the rate to fall.

Source: Mortgage Introducer

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London remortgage activity reaches nine year high

Remortgaging in London reached its highest level in nine years in the second quarter of this year, as customers locked into deals ahead of the anticipated base rate rise, UK Finance figures show.

There were 15,200 homeowner remortgages in the second quarter, 16.9% more than in the same quarter a year earlier.

By value there was £4.84bn of remortgaging, 23.2% more year-on-year.

Jackie Bennett, director of mortgages at UK Finance, said: “Remortgaging in London reached its highest level in nine years in the second quarter of this year, as homeowners locked into competitive deals amid anticipation of the recent base rate rise.

“House purchase activity has slowed slightly, with affordability remaining a challenge for many would-be borrowers. This underlines the need for clarity over the future of the Help to Buy scheme after 2021.”

There were just 6,800 homemover mortgages completed in London in the second quarter, 8.1% fewer than in the same quarter of 2017.

Meanwhile there were 10,300 new first-time buyer mortgages completed, 3.7% fewer than in the same quarter of 2017.

Source: Mortgage Introducer

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The base rate rise won’t have an immediate effect on rates

The Bank of England’s decision to raise the base rate from 0.5% to 0.75% won’t have an immediate effect on mortgage rates, lenders argued.

The Monetary Policy Committee’s unanimous vote meant that this is the highest the rate has been for nine years.

Paul Broadhead, head of mortgage and housing policy at the BSA,said: “The majority of mortgage borrowers will see no immediate impact on their household finances as two-thirds of existing mortgages are on fixed rates.

“Transaction levels amongst home-movers are already subdued, partly because of Brexit related uncertainty.  How much rates will move in such a highly competitive market remains to be seen.

“Lenders will need to balance the interests of savers and mortgage borrowers when making rate setting decisions.”

Jackie Bennett, director of mortgages at UK Finance, agreed, citing that most new loans are fixed.

She said: “The majority of borrowers will be protected from any immediate effect from today’s increase, with 95% of new loans now on fixed rates and almost two-thirds of first-time buyers opting for two-year fixed rate products over the last 12 months.

“There is no single indicator of the cost of funds to lenders. Lenders have individual funding models, with the cost and mix of funding sources varying considerably from lender to lender.

“As a result, when costing their Standard Variable Rate (SVR) or reversion rates, lenders are not necessarily led by the Bank of England Base Rate so any increase or decrease in the Rate may not be passed on to borrowers.

“Rates are still at an historic low and borrowers remain well-placed to get a good deal from the UK’s competitive mortgage market.”

However David Whittaker, chief executive of Keystone Property Finance and buy-to-let mortgage broker Mortgages for Business, said that it won’t be long until lenders have to look at their pricing with shorter terms likely to come first.

He said: “It won’t take lenders long to nail their colours to the mast and adjust their pricing, particularly those who have spent the last year absorbing costs instead of passing them onto borrowers.  Shorterterm fixed rates are likely to be the first to be punished.

“We may even see lenders hold off a little longer before adjusting five year fixed products.  But mortgage rates will be going up sooner rather than later.  Borrowers will have to expend a bit more blood, sweat and tears reworking their sums and cash flow projections.”

David Hollingworth, associate director, communications, L&C Mortgages, said that despite many borrowers looking ahead and getting a fixed rate, those that haven’t yet may now be finally be triggered to revisit their situation.

He said: “Although rates have been drifting upwards since the run up to the last rate hike, the fixed rate options are still very competitive. Those most vulnerable to rising rates will be borrowers on their lender’s standard variable rate.

“An increase of 0.25% for a £200,000 25 year repayment mortgage could increase monthly payments by around £25 or more.

“Reviewing their rate could offer them substantial cost savings as well as being able to lock their rate down and protect any further rate rises. Assuming that lenders apply any increase to their SVR, average SVR rates could be around 5%, although the range of SVR varies widely between lenders.”

Gemma Harle, managing director of Intrinsic mortgage network said the decision was no surprise because of the speculation that was rife in the market.

She said: “Due to this, many lenders will have already factored into their pricing this hike in interest rates.

“Today’s announcement represents only the second time there has been an interest rate rise in a decade which means many people are in for a shock as they will have not experienced such an increase and will therefore need to adjust their current spending to accommodate this rise.

“The knock on impact of this, is that it may make people’s mortgages become unaffordable. This will be especially true for mortgages that were taken out prior to the 2014 introduction of stress testing at the application stage.

“Those customers whose current fixed rate is coming to an end and were expecting to get a cheaper or the same fixed rate may also be disappointed.”

Source: Mortgage Introducer

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Variable savings rates fell ahead of interest rate rise

Average rates for variable savings accounts fell in the run up to the Bank of England Base Rate rise, research reveals.

This was the first time since April that the average easy access account and easy access ISA rates have fallen.

According to data site Moneyfacts, no notice rate (excluding ISAs) stood at an average 0.40% in November 2016, 0.37% in May 2017, 0.40% in October 2017 and 0.39% in November 2017.

Notice accounts (excluding ISAs) went from 0.68% in October 2017 to 0.66% in November. No notice ISA accounts stood at 0.63% in October, falling to 0.62% in November.

Given the fact that variable rates fell in anticipation of a Base Rate rise in November, Moneyfacts suggests providers may have been reducing rates in an attempt to minimise the effect.

Charlotte Nelson, finance expert at Moneyfacts, said: “While this fall in rates may simply be a case of poor timing, the fact that the recent Base Rate rise was almost seen as a foregone conclusion indicates that providers may have been reducing rates in an attempt to minimise any subsequent rate increases.

“Since the Base Rate rise, things have unfortunately not started to look any better for savers, with providers slow to announce changes and many not passing the full rate rise on. This all boils down yet again to the main banks simply not needing savers’ funds. To make matters worse, challenger banks who put their rates up and down on a regular basis seem not to use Base Rate as a marker.

“It’s not just providers who appear to have prepared for the base rate rise that occurred on 2 November – savers have too. Moneyfacts demand data shows that the amount people are looking to invest in fixed rate bonds has dropped almost 10% (-9.25%) from the previous month. Interestingly, the amount savers are looking to invest in variable rate accounts has increased by almost 5% (4.47%) over the same period.”

The latest data from the Bank of England also reveals an increased flow of money coming out of fixed rate bonds, showing that savers are reluctant to lock their cash away, and that they’ve been stashing their cash in accessible accounts in preparation for a Base Rate rise.

Nelson added: “Savers had hoped the rate rise by the Bank of England would inspire the banks to start offering a better return on their accounts. However, the reality is that savers are still going to have to work as hard as ever to get the best possible deals.”

Source: Property 118