Clare Francis: After six months of consecutive interest rate cuts the Bank of England’s Monetary Policy Committee (MPC) has decided to keep interest rates on hold at half a percent this month.
The move was widely expected but what does it mean for savers and borrowers? Well Kevin Mountford and Louise Cuming, who are our savings and mortgage experts here at moneysupermarket.com, are with me to discuss.
Q1: So Kevin, if we start with savers first I’m assuming this is good news because obviously after six months of falling rates, returns on savings have been hit dramatically?
Kevin Mountford: Yes I suppose you’re correct, the one thing I would say is there’s not much further they can go, so I suppose they’ve gone as low as they should and could. There’s always been a view from a consumer perspective that the rate reductions have not made a massive change to the economic environment and yet they feel as though they’ve been punished as a consequence.
Q2: Although there is some competition isn’t there between banks and building societies – they’re still desperate to attract our money from savers so the best rates are paying a lot more than the 0.5% Bank rate - and recently the main activities been in the fixed rate market hasn’t it, we’ve seen a few new deals launch this week?
KM: Yes, I guess over recent weeks and months that a lot of the focus and the pressures have been on the mortgage side and it’s got to the point now where banks and maybe beyond that, even Government, have started to look at the impact on savers. So there is a belief that they are trying to get the balance right.
Subsequently, as you said, the banks are still desperate for retail inflow so it’s all relative, you are getting somewhere in the region of 4% for a fixed rate bond, we have just come out of peak ISA season but there is still some good products being offered for 2009/2010 period of 3, 3.5% which is to a tax payers equivalent of 4%, 5%. These rates relevant to a half percent bank base rate are still very, very good offers
Q3: and do you think that competition is going to remain, because lenders still desperately need funds to lend out don’t they?
KM: Yes I think so, Louise will talk about possible shoots if any in the mortgage market, but they need the money in before they can lend it out. I think that the landscape now for banks has changed, maybe for certainly years to come. The dependence on retail money as opposed to wholesale – that’s the money they get from consumers versus that they get from each other – has changed dramatically so the main focus for most banks if not all – and building societies – will be savings inflow.
Q4: Louise, what is happening in the mortgage market because obviously one element is to attract funds from retail savers, which they can then lend out to borrowers, but obviously this hasn’t been enough and we have seen a severe shortage in funding and as a result it has been difficult to get a mortgage unless you have got a big deposit.
The Bank of England and the Government have been trying to alleviate this problem and get banks lending again, and last month we saw them announce quantitative easing – where they were creating new money and pumping it into the system – is there any signs yet that this is having any effect?
LC: Well there was some positive news last month – lending figures were up – but I think that was more because borrowers who have been waiting to see what happens, realised that on the opposite side from the savings story its great news for them - rates are probably as low as they are going to go and that has enticed a few of them out to start house-hunting again. But in terms of availability of deals its still very much equity is king, and lenders are fighting very hard for people with bigger deposits and more equity in their property and that’s where the good deals are.
Q5: Because we have seen HSBC this week increase the loan to value (LTV) on one of its leading deals to 85%, making it slightly easier because I think it was 60% before, but is that still very much a minority case?
LC: Well HSBC keep leading the way and I think they have played a really straight back right the way through all this crisis and it would be great if other lenders take their example but unfortunately when HSBC have taken these kinds of moves in the past, other lenders have just hung back and they are out on a limb really with the 85% deal.
Q6: If I ask both of you – the consensus among economists now is that interest rates have bottomed out and they are not going to go any further but obviously we had surprise further inflation figures last month showing that inflation rose – the CPI index was up – do you think we might see rates start to rise again this year or do you think they will just stay at this level into 2010?
LC: Well I think the effect of quantitative easing is absolutely key to that question, because it’s such a fine balance and if the Government get it wrong then inflation could start to get out of hand and I think they will move very, very quickly then and put rates up. So we are not out of the woods by any means and they will be playing a very close watching game, I don’t know if you agree with that Kev?
KM: Yes, I guess if everything else remained the same then we would have a period of stability of bank base rates, but as Louise said if it’s necessary then I think the MPC / Bank of England will react accordingly. Again the problem with this from a consumer point of view it just causes more confusion – one minute it has gone one way, the next minute it could possibly go the other. The other thing to remember is that we are looking at our position compared to bank base rate but as you rightly say cost of everyday goods are in some respects going up, so that return you are getting on, for instance savings, is getting eroded massively and then if you take pensioners who possibly don’t even have a mortgage have not benefitted like a lot of people have, they are in a worse situation, so there is a high degree of volatility - nobody know what to short term future holds - but lets just hope that stability in itself gives a little bit more confidence, and I think that is what we are all looking for.
Q7: Could that mean therefore that with regard to savings its perhaps not a great time to fix - are you in danger of locking in almost at the bottom - and the flip side I guess for borrowers is that it could be a good time to fix?
KM: I think for a saving point of view the fixed rate products generally are prices on what we call market swap rates, so if its three-year bond the likelihood is the provider sets the customer rate based on what they think the market is going to look like in three years and effectively hedge against that. I think one, two-year fixed rate bonds at the moment are worth taking a punt on, beyond that I would just wait and see. Because regardless of the economic environment which is unique in many respects at the moment these things are very cyclical and we have got to the bottom of the base rate curve and they will start to increase again in coming years. So if you want to lock your money beyond maybe two years, then just wait and see what the next few years brings.
LC: From a borrower point of view rates just cant go an awful lot lower, the difficulty there is actually if you haven’t go the equity then the fixed rates at the moment aren’t that competitive so if you are looking for 90% then there is an argument to wait and see because SVR is often quite a lot cheaper then the fixed rates.
Q8: And if you are not on the property ladder I guess there is no rush to necessarily buy - you can save, go into the highest rate you can find on a savings account, save your money and wait a few months?
KM: I think the interesting thing though is if we do see a change and base rates come under pressure and start to increase - the next question is how will the industry react? So we have talked about reflection of savings rates versus mortgage rates in a downward spiral. What will it be like when they go up and will suddenly savings rates start to increase? But it will be interesting to see how quickly they are passed on but I guess we will just have to wait and see on that one.
CF: Thank you both.
KM + LC: Thank you.