Have we reached the bottom of the interest rate cycle?

By Shane Shallow

As we commented last month the Government’s Office for National Statistics (ONS) has confirmed that the period of economic activity previously referred to as a recession that the UK plc experienced in the final quarter of 2011 and first quarter 2012 did not actually occur. Apparently the data has been revised and now suggests the economy did not actually decline but was merely stagnant, thereby avoiding two consecutive quarters of negative growth. This type of retrospective rebasing of data gives rise to the old adage of “statistics, damn lies and statistics”.

No doubt some will agree and some will disagree about the validity of continually recalculating data but the coalition Government will no doubt want to take credit for not presiding over an “official recession” on their watch.

Further encouraging economic news has generally continued to emerge in recent weeks, the BOE recently upgraded its growth forecasts for the economy and predicted that inflation should start to fall faster than previously thought. The outgoing Governor Sir Mervyn King also commented that “a recovery is in sight”. Unemployment continues to remain fairly stuck at around the 2.5m mark but the number of people in work continues to rise to new record levels supported by the fact that earnings growth continues to significantly lag the underling level of inflation. On the downside as a consequence household incomes remain squeezed and consumer confidence will likely remain more subdued while earnings fail to keep in touch with prices.

One of the debates in recent weeks has stemmed from comments from the US Central Bank (the Federal Reserve) that they may start to signal a reduction in their version of Quantitative Easing, in which the Fed has been pumping some $85bn per month into the US economy. This possible easing of the supply of cheap money has severely spooked investors across the globe with our own FTSE 100 index shedding some 10% of its value over a five to six week period.  In addition to the negative impact on investor appetite has been a spike in the bond yield that is instrumental in determining future long term interest rates in the US.

This possible signal of a reversal of recent policy has not been echoed by the heads of our central bank with Mervyn King suggesting in a recent speech that it would be a long time before interest rates increased in the UK. Notwithstanding Sir Mervyn’s comments, his current deputy Paul Tucker (who will also be departing the bank) has asked regulators to study how vulnerable borrowers and financial institutions might be to any sharp upward movement in long term interest rates. Their report is due in September which we await with interest as the possible consequences of its findings may well have a significant bearing on short to medium term UK monetary policy and the direction that our new BOE Governor Mark Carney takes the economy in.

Although some of the discussion has been around possible future increases in interest rates we are not seeing that reflected in recent mortgage pricing although several lenders have recently withdrawn some products from the market without any immediate replacement offering.  With the Funding for Lending scheme being extended into 2014 lenders that want to and those that can access this facility should be assured of a continuing supply of cheap funding. Most of the major lenders are committed to lending more this year than last year and as a consequence competitive pressure should continue to offer great value products relative to historic levels for those borrowers who want to buy, move home or remortgage but we may have just reached the bottom of the interest rate cycle.

Brian Murphy is Head of Lending at Mortgage Advice Bureau

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