We're not in mini-Budget territory yet!
Before I start, you may be interested to know that this is the second draft of this article. The first was written as soon as the latest inflation figures ‘dropped’ last week, but things have moved so quickly – as advisers will know only too well – that I’ve had cause to revisit my initial thoughts in light of what is happening.
In fact, part of me is a little reticent about going into this subject matter now because it would seem there is still a lot to come out of the wash in terms of lender activity and changes. As I already knew, you can be out of date very quickly in this market.
However, what I can be certain of is that we have seen a further and significant shift in the mortgage marketplace as a direct reaction to last week’s inflation figures, which on the surface might have looked positive with the fall to 8.7%, but a deeper dive revealed to be far from the upbeat assessment the Government were hoping to be provided with.
It soon quickly became apparent that the core CPI inflation figure (which excludes energy, food, alcohol) was the more relevant one to focus on and the fact it increased from 6.2% in March to 6.8% in April clearly concerned the money markets for all manner of reasons.
We should also not forget that food inflation barely dropped at all, only down marginally to 19.1% from 19.2% and again it is these sorts of figures which weigh heavily not just on consumers but also the Bank of England in terms of what it does next to counter inflation.
And, that of course, is the million dollar question. With what seems like limited tools at its disposal, and with that Core CPI inflation figure actually going up, the markets have made their feelings known in a very short space of time about what they see as the inevitable march upwards of Bank Base Rate, presumably through the rest of 2023.
Within a few short hours last week we went from a market assessment that the peak for Base Rate would be around the 4.75% mark this year, to a new view that we can now expect and anticipate multiple rate increases potentially taking us up to 5.5%.
That 2% inflation target seems an utterly fanciful ambition at the moment, and Rishi Sunak’s pledge to halve inflation by the end of the year also looks like being a difficult mountain to climb.
It does seem inevitable that future rate rises are on the way, and the swap markets have certainly reflected that since last week. In fact, you might well argue they saw this coming because swaps have been rising for the last few weeks.
We are not in ‘mini-Budget’ territory but the direction of travel is clear, and obviously lenders have needed to react – and react quickly – to what is happening to their funding costs, and as we know when one reacts, even those who are not in thrall to the money markets for their funding, also have to act.
The domino effect has been clearly visible in recent days, and if I’ve heard the phrase ‘we don’t want to be last lender standing’ once, then I’ve heard it multiple times.
That’s certainly an important point to make – not only do lenders not want to be out there with market-leading rates which can no longer make them money, but they don’t want to be swamped by business which will overwhelm their ability to service it and will have a knock-on effect in terms of the new product ranges they put out there.
In that sense, there is some good news, in that I fully anticipate – and it’s already happening – that those lenders who recently pulled their product ranges, for example, are unlikely to stay out of the market very long. However, as we all know, these re-entries are obviously going to be at a different, higher price point, and that clearly has an impact for borrowers, who would have been hoping for the opposite.
The reality is that this is a salutary lesson for all stakeholders, in terms of the quickness of change that can happen in the mortgage market but also how the current economic situation can shift the dial on our sector with lightning speed.
It is also perhaps a message for advisers to deliver to those clients who have been waiting for a better rate environment to materialise, particularly those who have never known rates any different to the historically low levels we were lucky enough to have during the past decade or so.
The fact is that interest rate cuts are not inevitable at all – quite the opposite. They are just as likely to go up and, obviously, we’re seeing that right now with product pricing. Again, we don’t need an MPC decision to move our market and as advisers you can only advise in the here and now, not be rate predictors of a future which is unlikely to materialise. It is a message which consumers in particular need to hear and one we shouldn’t shy away from delivering.