The Bank of England may have kept rates on hold at 0.5 per cent last week, and the 3-month Libor rate may still be edging lower, but that is unlikely to stop many UK lenders from raising mortgage rates as soon as next week.
So, at least, writes mortgage expert Ray Boulger of John Charcol in his blog, indicating the move is most likely to affect longer-term fixed products.
So what’s the justification? Well, while the Libor and short-end interest rate environment remains placid, medium and long-term swap rates are moving stealthily higher alongside the recent rise in government bond yields. As Boulger explains (our emphasis):
Medium and long term swap rates have risen sharply this week, with most of the increase taking place on Wednesday and Thursday. 2 year swaps are only up 0.08% on the week, but the 3 year rate is up by 0.19%, 5 years by 0.26% and 10 years by 0.28%.
The increase in swap rates is the key driver for the rate changes and these increases have taken place while the 3 month Libor rate is still falling, albeit very slowly. 3 month Libor is 0.03% lower on the week at 1.42%, still a historically very large spread of 0.92% above Bank Rate, compared to a typical 0.15% before the credit crunch.
Which in Boulger’s view means the market is becoming increasingly inflation focused from the medium term onwards:
I am surmising that the main reason for the increase in gilt yields this week, and the even bigger increase in swap rates, is that the market is getting increasingly nervous about the medium term inflationary outlook in the light of the additional £50bn the MPC confirmed yesterday for the Quantitative Easing programme. This virtually guarantees that Bank Rate will remain at 0.5% for at least the next 3 months while the Bank spends the remaining money they are “printing” and so short term rates like 3 month Libor will remain low and probably fall a little further. US$ 3 month Libor hit a new all time low today of 0.94%.
As for RBS, the part-nationalised lender many would expect to be most committed to the government’s bank-lending promise, Boulger writes that it, ironically, will be raising rates the most and across its entire product range — not just fixed rate deals.
As he explains:
RBS is taking the most draconian action with increases of between 0.1% (for their maximum 70% LTV range) and an outrageous 0.7% for their rates up to 80% LTV, with the rates to 85% being increased by 0.5%. These increases are allegedly to protect their service levels but with excuses like this RBS are just as bad as Ministers with their pathetic excuses over their expense claims. Plenty of experienced mortgage staff have been made redundant over the last year and so RBS would not have any difficulty adding to its back office if the real reason for the rate increases was staff shortages. We should be able to expect more honesty, especially from a semi nationalised lender, and if RBS want to cut back their lending they should be honest enough to say so, even if it embarrasses their principal shareholder which has committed them to increased mortgage lending.
Going back to the swap market, meanwhile, it’s worth pointing out that it isn’t only UK swap rates that have been moving higher, further out on the curve. It’s a similar story in the US, where on Friday the market even saw a rise in shorter-term US swaps despite a falling Libor rate.
The back-end swap hikes, of course, tie in with the recent trend in rising government bond yields.
Here are some Bloomberg charts depicting just how the curves have changed in a few months:
Related links:
Down yields down! – FT Alphaville
Higher yields do not mean normalisation – FT Alphaville