QE move should boost longer fixes

This is according to John Charcol’s Ray Boulger who said. “Whilst an unchanged Bank Rate was very much par for the course, the MPC’s decision to increase QE by as much as £75bn, to be utilised over the next 4 months, suggests it is even more bearish on our economic prospects than most economists.

“Although the MPC is still forecasting the CPI will rise “above 5% in the next month or so” it is also now being more positive in saying it expects CPI to undershoot the 2% target in the medium term.

“In authorising the increase in the ceiling for QE the Chancellor has confirmed that eligible assets for purchase are as set out by the previous Chancellor when the QE programme started at the beginning of 2009 and include gilts and private sector assets. However, so far almost all of the purchases have been gilts.

“Furthermore Mervyn King has given the clear impression he is much more comfortable buying gilts than private sector assets and so in the absence of anything in the MPC’s much longer than normal statement to the contrary it seems any significant change of policy on the type of asset bought is unlikely.

“Bearing in mind the Fed’s recent “operation twist” the most interesting unanswered question in the MPC’s statement is what maturity terms the Bank will primarily focus on.

“If the Bank concentrates its buying power at the longer end of the gilt market the it will result in a contraction of the yield spread when compared to short and medium dated issues.

“This should allow mortgage lenders to offer longer term, say at least 10 years, fixed rates at a keener margin over 5 year rates than we have seen to date.

“Although demand for longer term fixed rate mortgages is fairly small the closer the rates get to 5 year rates the more borrowers will be tempted to fix for longer.”