RAY BOULGER: Even lower mortgage rates on the way?

“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 three 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.”