Focus on what rates are doing now, not next

Well, what a difference a week makes.

I’m writing this on the day of the MPC announcement of its decision to increase Bank Base Rate (BBR) to 4.25%, which in the space of a week, went from being ‘highly unlikely’ according to many forecasters in the immediate aftermath of the Budget and all the OBR forecasts, to a ‘racing certainty’ over the course of the last 24 hours.

If this recent period teaches us anything, it’s that “events dear boy, events” have a habit of kicking even what seems like the most obvious predictions not just out of the ground, but out of the postcode the ground is situated in.

A week ago, it all seemed so different. The OBR’s headline forecast for inflation to be down at 2.9% by the end of the year was due to be solidified by this week’s actual inflation numbers, which were forecast to have dropped below double figures.

Instead, what we got was an increase to 10.4%, and those of us who have been saying that UK inflation looks much more stubborn than the OBR forecast was suggesting, might appear to feel something of a vindication.

Now, of course, by the time we reach the end of 2023 that OBR forecast might be bang on the money, but I think we can all accept that in order to hit this level, we are going to have to see some really sizeable falls over the next eight months, and clearly the MPC Committee are not nearly so confident that this can be achieved without further increases to BBR.

Hence, why when we all refreshed our computer screens at midday today we found the news that had seemed inevitable – particularly after the Fed raised rates in the US yesterday – a rise in BBR by 0.25% to 4.25%.

No sooner had this news started to filter through than we have been greeted with a wide range of commentary, all suggesting this is now definitely the peak and they see no way that any further rate rises could happen.

Again, let’s be clear, many seasoned economists and commentators were saying exactly the same thing a week ago, and it would be the height of arrogance to think that when it meets again on the 11th May, the MPC won’t vote to make a similar decision again. Particularly if that stubborn inflation figure is still well... stubbornly high.

For an advisory profession that is constantly asked by all who interact with it, ‘What are rates going to do next?’, I suspect the overwhelming answer has to be another question namely, ‘What are rates doing now?’

Because that is the most important one for new and existing borrowers who are seeking advice, and of course as we know, for them it is all about the product rates, choice, availability and meeting criteria, rather than simply assuming that Base Rate or swap rates are what is going to be achievable right across the board.

As we know, our market doesn’t work like that, which is why you can currently get residential mortgages beginning with a three, when BBR is 4.25%, and why in both that part of the market and our buy-to-let sector, we have seen rates falling in the past week or so.

The reason being of course, and here is something for all of us to consider in the grand scheme of themes, that even with the recent swap rate rises in the last couple of days and since the MPC meeting, the SONIA rates (as of today) are all still below where they were at this time last month.

In that sense, and it would be somewhat foolish to speculate on what happens next, the trend for swaps at least in 2023 remains down, and if this really is the peak of Bank Base Rate – as many believe – then it’s likely that (at worst) swaps will stay bouncing around this level for a while.

Of course, who really knows if this is the peak? If it is, all well and good, but the questions will then come about when BBR will be cut? If it’s not the peak, well that question will also be on hold – presumably until the meeting when the MPC decides not to increase BBR.

For all of us, and bear in mind Fleet has just cut rates on our two and five-year fixes, this remains about the here and now, and for advisers it is really about working with what is available and the current pricing, not what might (or might not) be about to happen in the months and weeks ahead.

None of us can run our businesses on what might be, particularly when it comes to the future trajectory of rates. It won’t stop the speculation your clients will see, or the variety of views they might hear, but by focusing on the reality of their situation and what they can access, it will keep both them and you grounded.