by Mark Johnston
The Bank of England’s Quarterly Inflation Report has been eagerly awaited by many industry watches as it gives an insight into how the UK’s interest rate setters view the wider economy. This in turn can give a rare insight into what might happen to the UK interest rates.
The report out today gave an interesting view on the future of interest rates based on the swap markets, these are the markets in which banks borrow money. The five year swap market was trading at 1.09% in October and following the publication of the report jumped to 2.25% showing a massive and unusual swing.
The report which caused the jump said: ‘There are significant uncertainties around the outlook for inflation. The near-term overshoot of the target may be more pronounced, particularly if there is continued strength in commodity price inflation, perhaps linked to robust growth in emerging economies.
It went on to say: “And the recent sustained period of above-target inflation might cause inflation expectations to rise, putting further upward pressure on inflation itself: that risk would be heightened if commodity prices continued to increase. The most likely outcome is for inflation to be slightly below target by 2013, but relative to that most likely path, the risks are judged to be skewed to the upside.”
The Bank of England Monetary Policy Committee which is responsible for setting interest rates which are mostly linked to mortgage lending rates is responsible for keeping inflation below 2% over a two year period.
The rise in swaps could signal an increase in the cost of mortgage borrowing for fixed rate home loans. Its worth keeping this in context though. Although this is big news for the city in regards to short term swap fluctuations, the increase could drop back to previous levels just as fact so borrowers may have no need to worry just yet.
HSBC has a two year fixed rate mortgage which is currently at 2.89% for those with a 40% deposit or equity in their current home as this has a 60% loan to value (LTV) ratio. The booking fee is a low £99 and the cost for comparison is 3.8% APR. After the two year term the loan drops to the banks standard variable rate which is currently 3.95%.
The Yorkshire Building Society has a similar deal at 2.89% for two years but has a more manageable 75% loan to value (LTV) ratio but with higher fees of £300 and a £195 booking fee the cost for comparison is high at 4.7% APR.
The Yorkshire Building Society also has a 5 year fixed rate version at 3.69% with a 60% loan to value (LTV). The booking fee is £1,495, £195 of which is a non refundable payment on application. APR is 4.7%.
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