An unchanged Bank Rate today was a foregone conclusion but as it marks the 5th anniversary of the cut to an all time low of 0.5% it provides a convenient opportunity to put this exceptionally long period of stability into some historical context.
The previous lowest Bank Rate was 2% and although the rate has hit that level several times in its long history there were only two occasions when it remained at this level for more than five years, between May 1932 and July 1939, when it briefly rose to 4% as war approached, before falling back to 2% only two months later in September and staying there not only throughout the Second World War but up to October 1951, i.e. just over 12 years.
The likelihood of Bank Rate remaining at 0.5% for 12 years is clearly negligible. Nevertheless it is worth noting that back in 2009 most economists forecast Bank Rate would start rising in 2010 or 2011 and only one, Capital Economics, forecast it would remain at 0.5% for five years. Furthermore, Japan’s benchmark interest rate has now been at 0%, or very close to it, for 18 years, again confounding the economists of the 1990s!
The highest Bank Rate has ever been, although at the time it was called Minimum Lending Rate, was 17%, a level it rose to on 15 November 1979 and remained at until 3 July 1980.
The rate had previously been as low as 5% only two years earlier and after such a massive rise in such a short space of time the Government lent on mortgage lenders not to reflect the full impact of the increase in their SVRs, which was the rate most mortgage holders were paying in those days.
One other statistic worth noting is that the year in which the largest number of rate changes took place was 1982, when The Bank changed its rate 36 times, starting the year at 14.375% and ending at 10%, although at the time the rate was called the Minimum Band 1 Dealing Rate and so was not directly comparable as rate changes were made on a different basis.
The almost unanimous tone in comments from various MPC members is that when Bank Rate starts to rise the increases will come slowly but there is an understandable variety of opinion on when the first increase is likely.
Last week one MPC member, Martin Weale, suggested the first Bank Rate increase will be in the Spring of next year, although presumably not at the MPC’s May meeting, which, unless its normal timetable is changed (which it probably will be), will coincide with General Election day.
However, to put this in context it is perhaps worth noting the title of a speech Mr Weale made on 13 June 2011 – “Why the Bank Rate should increase now.”
Mortgage Rate Changes
Since the end of last year swap rates have fallen, with two years swaps down from 2.16% on 31 Dec to 1.96% yesterday and five year swaps having fallen slightly more, down from 3.02% to 2.79%. During this same period the rates at which the cheapest fixed rate mortgages have been on offer have hardly changed, with a small fall in the best 2-year fixes and a small rise in 5-year fixes.
Although most recent fixed rate mortgage rate changes in the 5-year market have been upwards, it has become increasingly noticeable that many lenders are not moving rates uniformly across the LTV spectrum, as they try to manage their spread of business in terms of the average LTVs they want. For example today both Virgin Money and Platform have announced some fixed rate increases on lower LTVs but decreases at higher LTVs.
Other lenders are increasing rates to manage the inflow of applications prior to the IT system changes they need to introduce to accommodate the enhanced reporting requirements to the FCA as a result of the Mortgage Market Review, with many lenders planning to introduce the new rules prior to the deadline of 26 April.