Poor inflation judgment by the Bank of England has pushed interest rates to soaring levels for a second day running, suppressing any hopes of looming cut in new mortgage rates.
Three-month sterling Libor, the benchmark rate used to price many loans, soared by 0.04 percentage points to 5.84%, bringing the rise to 0.08% in just two days and wiping out most of the improvement of the previous three weeks.
Moneyfacts say the average rate for a two-year loan reached 6.64% Thursday, the highest rate since 2000.
Two-year swap rates, a key benchmark for fixed-rate mortgages, have leapt from 5.27% cent to 5.63% in the space of a week. However, Moneyfacts says that there is still hope and that despite what was happening in the market, the fixed-rate mortgages would rise again.
Darren Cook, of Moneyfacts, said: “We’ll see a bit of a lag and then fixed-rate mortgage rates are going to go up again.”
Homebuyers and borrowers looking to remortgage had already been warned to brace themselves for the worst mortgage terms because of the shift in expectations about base rate over the next year.
On Wednesday the government announced plans to purchase newly built properties from housing developers whose sales are plummeting.
Latest reports suggest that UK’s biggest banks are now preparing to swap as much as £90 billion of mortgage-backed assets for Treasury bills with the Bank.
Before Wednesday, Libor had been falling almost daily for three weeks as traders priced in further cuts in base rate this year and took heart from the Bank’s £50 billion liquidity injection which is now likely to rise by as much as £40 billion.
Libor’s inflation report which ended the three-week fall, forecast that inflation would rise far more than previously anticipated, dispersing hopes of any looming base rate cuts.
David Hollingworth, of London & Country, the mortgage broker, said: “The mortgage market has effectively gone back in time by one month in one day. The Libor move is disappointing because it had been coming down. For this trend to be reversing already is not a good sign. This is not going to help lenders’ funding issues, so we could see rates starting to edge up again.”
April 10 marked the last base rate cut of a quarter point and since then, records show that 53% of lenders have failed to pass on the full benefits to borrowers on standard variable rates.
According to Moneyfacts, the lenders have also failed to cut loan costs.
Nationwide Building Society led other banks in starting to inch new lending rates downward by cutting the rate on a two-year fix from 6.1% to 5.95%. It also issued a warning Thursday that once funding for that tranche of mortgage money ran out, it would review rates again in the wake of change in Libor.
On Thursday Abbey reduced the rates on its tracker mortgages and some fixed-rate deals by a token 0.05% in anticipation, the lender said, of Libor falling, but it refused to rule out reversing the cuts if Libor did not decline.
Previous forecast by economists have been altered significantly in light of Libor’s Inflation report. Royal Bank of Scotland which
Economists have altered forecasts for base rate significantly in the wake of the Inflation Report. Royal Bank of Scotland, which earlier predicted a quarter-point cut to 4.75% by year end, said it now expected base rate to stay at 5% into 2009.
However, Capital Economics, an arch dove, were optimistic that the base rate would fall only to 4.5% by the year end, rather than the 4 per cent it had previously forecast.
