UK Inflation Update

Update from Tim Lynch

In the recent Mortgage & Housing Market Update, I referred to April's inflation figure as being highly important for the overall interest rate outlook. The inflation figure has fallen below 10% to 8.7%. However, the market was expecting a fall closer to 8%. This, together with a big upgrade on the UK economy from the consistently pessimistic IMF, has resulted in the SWAP rates (lenders’ fixed rate hedging instrument) soaring by c. 0.40%.

This is because it’s now widely expected that the Bank of England (BoE) will have to increase their base rate to 4.75% at the June Monetary Policy Committee (MPC) meeting, following up with further increases to over 5% at the August and September meetings to help bring inflation down.

I now fully expect lenders to reprice their fixed rates higher in the coming days as the current best buy fixed rates are priced between 4.10%-4.50% (depending how long you fix for), which is very generous considering the equivalent swap rates are > 0.70% higher.

I’d suggest anyone on a tracker rate should review their mortgage as soon as possible as most lenders offer a switch to fix facility, but only do so if you don't mind being tied into a fixed rate with early repayment penalties. As all borrowers’ circumstances are different, taking expert advice is of utmost importance.

The markets for interest rates are as volatile as they have ever been so all eyes are on the monthly inflation figures. The inflation figure for May will be released on June 21st, and if the figure comes in at say 0.5% lower than expected, then all bets are off for further increases to base rates. It really is that volatile!