Paul Tucker’s suggestion of negative interest rates opens the door for even lower mortgage rates

• More Cuts in Fixed Rate Mortgages on the Cards

Ray Boulger of leading independent mortgage adviser John Charcol comments on suggestions from Paul Tucker to the Treasury Select Committee (TSC) that negative interest rates are on the agenda.

“Negative interest rates will increase the pressure to lend and the mortgage market would be a major beneficiary of any such action. This increases the likelihood of genuine cuts in 2 year fixed rates (as opposed to lower rates financed by higher fees) as well as a further narrowing of the yield curve with the scope for more cuts in longer term rates as well.”

“Today’s comment from Paul Tucker, a Deputy Governor of the Bank of England, about the possibility of negative interest rates, opens up a whole new area for debate about how best to stimulate the economy.

“Mr Tucker said that he has previously raised the topic of negative interest rates and the fact that he has now chosen to go public with this suggestion implies that there is now more consensus at the MPC than at even 3 weeks ago at its February meeting that more stimulus of some sort is needed.

“Floating new ideas in public prior to implementation, to avoid shocking to the market, appears to be part of the recent more transparent policy from The Bank, perhaps influenced by the forthcoming arrival of Mark Carney.

“Mr Tucker said “We’ll continue thinking about policy options” and “I hope we will think about whether there are constraints to setting negative interest rates. This would be an extraordinary thing to do and it needs to be thought through very carefully.”

“Paul Tucker also highlighted the fact that the euro problems have not gone away, saying that while the risk from the euro area had receded, it remains “a major threat.” The indecisive Italian election result is just the latest event to remind markets that the fundamental flaws in the euro experiment have only been patched over.

“In the U.S. later today, Ben Bernanke, Federal Reserve Chairman, will deliver his semi-annual testimony on monetary policy to the Senate Banking Committee in Washington and it is inconceivable that the Bank of England and the Fed did not speak to each other about what would be said to the TSC and Senate Banking Committee and so Bernanke’s comments will be watched in the UK with even more interest than usual.

“Gilt yields fell a little yesterday, demonstrating yet again that the rating agencies are a busted flush, with the markets having worked out well before Moody’s how gilts should be rated. Yields have fallen again today but this appears to be more in response to the Italian elections than Paul Tucker’s comments. At the time of writing UK and German 10 year bond yields have today fallen 8 basis points to 2.0% and 7 basis points to 1.47% respectively, whereas Italian, Portuguese and Spanish bond yields have all risen sharply, the former by 36 basis points to 4.85%. However, the euro problems are part of the reason for the MPC considering further drastic action and so these issues are all interlinked.

“A key aspect of any move to negative interest rates would be to encourage banks to lend more by making it expensive to keep excess liquid assets on deposit at The Bank. This is rather ironic as the Basle 3 rules and pressure from the FSA on lenders to increase their liquid assets has had the exact opposite effect.

“Most tracker rates do not have a collar and so in the event of a bank rate cut most borrowers with a tracker mortgage would receive the full benefit, as would those on an SVR directly linked to Bank Rate, i.e. borrowers on the old Nationwide, Cheltenham & Gloucester and Lloyds TSB SVRs. However, SVRs generally are unlikely to fall but many borrowers on SVR could still benefit by switching to one of the cheaper fixed rates that are likely to result.”

Borrowers should contact John Charcol on 0800 71 81 91 or visit www.charcol.co.uk

For further information, please contact:

Ray Boulger

020 7933 9691

07977 277431

Your initial consultation is obligation free.  There will be a minimum fee for our service of £450, of which £150 is payable when you apply, and we will retain the commission from the lender.  Alternatively, you can choose the fee only option which is typically 0.65% of the amount borrowed.  The precise amount will depend on your circumstances and loan amount, and will be discussed and agreed before you make an application. 

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

John Charcol is a trading style of Towergate Financial (West) Ltd which is authorised and regulated by the Financial Services Authority.  Registered in England No: 02292688. Registered office: Towergate House, Eclipse Park, Sittingbourne Road, Maidstone, Kent ME14 3EN.