An ageing population and low productivity are not normally highlighted as being a potential positive, but a recent blog from the International Monetary Fund (IMF) suggested it would be those countries who had both, who might ultimately benefit from much lower interest rates in the future.
Lo and behold, the UK is likely to be one of those countries, and as a result the IMF is suggesting our current rate level may not be the next ‘new normal’ we see for the foreseeable future and may actually just be a staging post before moving back down to the rates we benefitted from, pre-pandemic.
This may sound like music to the ears of those who are fortunate to be a year or two away from their next remortgage, but understandably there are a number of caveats to this prediction.
For a start, when is this period of high inflation likely to be over? The recent OBR prediction suggested UK inflation would not be a million miles away from its 2% target by the end of this year, however this was before inflation rose again in March to 10.4% and remained in double-digits last month, and as I and many others have stated before, there is going to need to be some sharp monthly reductions over the rest of the year in order to get to that level.
Are we going to get these big falls as the Bank of England is telling us we will, or is inflation much more of a stubborn beast to fell, and will the MPC have to actually increase Base Rate again next week in order to get those sharper falls?
The IMF forecast is also predicated on our Government getting a handle on debt, and while we have certainly moved a considerable way forward from the ‘Mini Budget’ debacle, debt levels remain high and will do so for some time.
However, if this future is realised and we do gain control of inflation over the next year or two, then we could well see a point where rate rises begin to be reversed, and of course if swaps were also to continue on a downward trajectory, then our sector and our clients would likely feel the benefit in terms of product rates below what is on offer right now.
In that sense, would the end of 2022 and early 2023 be regarded as a necessary blip, when reviewed in years to come? I’m not sure how much you could call the ‘Mini Budget’ necessary, but even without this shambles, it was likely that rates were going to have to be increased in any event, in order to get inflation under control, just perhaps not as far and as fast as we have seen over the course of the last six or so months.
But, and this is with an optimist’s hat on, just as we have seen multiple increases in BBR over the course of the last year, with inflation under control, there is surely the option for the Bank to move in the opposite direction with both significant and multiple cuts.
Where might that possibly push us in terms of product rates? Well, if we believe that a BBR of over 4% is necessary to bring inflation down to target through the rest of year, it doesn’t seem unreasonable to think you could shave one or two percent off this during 2024 and 2025.
Indeed, the IMF go much further than this, suggesting the UK’s ‘natural’ interest rate is actually 0.3%, even lower than what it predicted before the pandemic hit.
At the moment, that might seem somewhat fanciful, and we know that mortgage product rates will typically be disconnected from BBR, and certainly for the bulk of our mortgage products much more determined by money market swaps.
However, with BBR currently at 4.25% – but perhaps on the verge of going up to 4.5% – we have lower-risk residential five-year fixes available around the 3.9%. It is not inconceivable to therefore think we could be moving back to rates beginning with a two sooner than we think, albeit again this would be reserved for the lowest risk borrowers, and there would need to have been plenty of water under the bridge before we got there.
Overall, however, we know that the market is what the market is at any given point in time, and therefore borrowers will only be accessing product rates as they are now, not what they are in the future. However, if they do believe rates are not long for these higher levels, then this may move their thinking in terms of the term they opt for, especially if we do get that lower rate environment in 2024/2025. Shorter-term product options perhaps become more attractive with this perspective.
There is much to ponder here, but I’m sure like me that any outlook which produces lower interest rates for borrowers is one that is going to be welcomed. Let’s hope this is one prediction that might have a chance of coming true.
Rob Clifford is chief executive of Stonebridge
