Bank of England base rates held at 5.75% - 4/10/2007

At lunchtime today the Bank of England Monetary Policy Committee decided to keep the UK base rate at 5.75% for the third month running.

There were a few who believed that interest rates would fall in line with the recent 0.5% cut in the US Federal Reserve rate, however, most analysts feel that rates will remain stable and we should hopefully see a rate cut early in 2008.

There is still widespread concern in the wholesale money markets following the credit crunch sweeping the world since the run on Northern Rock and the huge losses being seen from the banks on the back of the US sub prime crisis.

However, Nationwide yesterday announced that house prices are still continuing to rise with a ‘reasonably strong gain of 0.7% between August and September, seemingly shrugging off the unsettled events of the past month’. The rate of house price increase is reducing which does point to a slow down in housing demand and it is expected that this trend will continue into 2008.

The good news is that inflation is still looking good and whilst this continues we should see a period of stability for anyone whose loan or mortgage is linked to the BoE Base Rate. Fixed rate customers are protected anyway, unless shortly leaving a cheaper rate fixed product. Indeed anyone currently looking at ‘tracker’ type products may actually find the rates a lot higher than normal above base rate in view of the market unease. Customers who have trackers linked specifically to BoE base rates are protected.

The real squeeze is occurring in the sub prime market. Over the last two months the changes here have been very dramatic with a return to conditions and products seen a few years ago when secured products and plans were available to customers experiencing credit problems but only if they had at least 25% additional available equity in their property.

However, within the next few months there should be good news for customers with a good credit rating as banks and building societies will be falling over themselves to offer these customers attractive propositions to counter their sub prime losses. But again, there is always supply and demand.

‘I predict that there will be a dramatic growth in demand for products for customers with some adverse credit who currently sit within the 75% - 90% loan to value bands. With demand there will be new product offerings and whilst it will take some time for the market still to settle wherever there is demand you will generally find companies who wish to take advantage of any opportunity. The downside will be the cost of these new products to the consumer and every effort must be made to regulate this’.

~ Steve Burnage