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Brexit and Interest Rates

interest rates, base rateYou can’t go anywhere or do anything at the moment without Brexit being mentioned. Twenty four hour news channels streaming endless Brexit commentary is leaving the writer somewhat deflated and in search of a convenient wall to bang my head against.

I’m not going to comment on Backstops, Customs Unions or Trade Agreements as they are outside of my sphere. Instead I’m going to talk about the effect of Brexit on interest rates and therefore our pockets.

It is not likely we will be leaving the EU with no deal but if this were the case I would predict at least a year of difficulty for the UK Economy. Traditionally in circumstances where the economy is suffering the Bank of England would look to stimulate the economy with the fiscal measures at it’s disposal. These measures would likely be a cut in interest rates and possibly further quantitive easing. How effective an interest rate cut would be is debatable. The rate currently sits at 0.75% so still historically low. High street lender mortgage rates are currently very competitive, allbeit around 0.3-0.4% higher than they were a couple of years ago. However we are a country that is heavily mortgaged so even a small decrease will give consumers more money in their pocket with which they can spend, spend, spend.

The economy is robust according to the Chancellor, Philip Hammond, having experienced nine consecutive years of growth and further growth predicted. He also stated that wages are still rising. Both these are traditional indicators of a possible interest rate rise. However right now the situation is too uncertain for the Bank of England to start pushing rates up. The withdrawal deal has not been agreed and at the moment there’s no indication of when it will be agreed so this puts pressure on the economy and the Monetary Policy Committee, I feel, would be hard pressed to justify any rise in rates now.

The housing market has most certainly slowed in the last 12 to 18 months with transactions down, supply down and demand down. House prices have not yet taken a big hit but they do not appear to be rising either. I do not think a rate cut will necessarily stimulate the housing market as rates are low as it is. It is the uncertainty that is causing the slowdown. I think concern about jobs and prices in the future is bothering the UK Consumer.

If a deal is reached then this will offer a little bit of certainty as we will at least have an idea of what the future relationship with Europe will be and how this may affect jobs and prices here in the UK. In the event of the withdrawal  deal being finalised I still think we have a period of a couple of years while the various deals are done and withdrawal actually takes place. In this light I can see interest rates staying put for at least the first year before we have an idea of where we are going economically. After this I see the Bank of England increasing rates to around 1.25% by mid 2021.

As I’ve said before, take a look at what the high street lenders are offering for an indication of how they feel. Still available are five year fixed rate deals at less than 2%. That is good value for money and if they are happy lending at that level then they don’t think rates are going too crazy in the next few years.

If you are thinking of borrowing more for a move or a remortgage then I wouldn’t be put off by the prospect of rising interest rates. I guess the decision comes down to your general feelings around job and income security going forward.

For this blog I have given personal opinion and taken influence and material from ftadviser.com and the Chancellor’s Spring Statement 13th March 2019.

Update at 17:30 on 13th March – just seen this article supporting some of what I have said above:

Growing job security and property price fears holding back homebuyers – BSA

Richard Bousfield: With years of experience in the mortgage and protection (insurance) market, I work as a financial services expert looking after clients in London and Surrey. My plain speaking, straight-forward approach is my USP, giving clients quality professional advice matched to their individual requirements.

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