Brexit increases likelihood of negative interest rates

Brexit increases likelihood of negative interest rates

The mortgage market is bracing itself for the increasing probability of interest rates falling, as a result of uncertainty following the UK’s vote to leave the European Union.

The swaps market is now pricing in a 15 per cent chance of the base rate turning negative in the coming months, with a 50 per cent chance of an interest rate cut in July, a 65 per cent chance of a cut by August, and an 80 per cent chance of a cut by the end of the year.

Laith Khalaf, senior analyst at Hargreaves Lansdown, pointed out this is good news for borrowers, who can now expect lower mortgage rates for even longer.

“The Bank of England may soon find itself between a rock and a hard place, if the economy and inflation start pointing in different policy directions,” he stated, adding that is because although the Brexit vote has increased economic uncertainty, it has also taken a toll on Sterling, likely to feed into inflation as it makes imports more expensive.

“This raises the uncomfortable prospect for the central bank of cutting interest rates while inflation is rising, something it has proved it is willing to do in the past in order to boost the economy.”

Bank of America Merrill Lynch predicted interest rates falling from the current 0.50 per cent to zero next month, with chief UK economist Robert Wood and chief European economist Gilles Moec stating the central bank will follow its financial crisis template: make liquidity easily available, ignore the one-off inflation shock from sterling and ease monetary policy.

“We expect for them to cut interest rates 50 basis points at their 14 July policy meeting. We also expect the Bank of England to relaunch quantitative easing with a £50bn salvo; we pencil that in for August.”

Meanwhile, a statement from research consultancy Capital Economics read: “We think that a cut in interest rates in the near term looks likely and possibly even a restarting of the quantitative easing programme.”

The latest figures from the Council of Mortgage Lenders showed gross mortgage lending hitting its highest May total since 2008, although senior economist Mohammad Jamei admitted “considerable uncertainty” as a result of the EU referendum decision.

“We expect this to affect sentiment and reduce activity below levels that would otherwise be expected in the near term, as both buyers and sellers adopt a wait-and-see attitude until the dust begins to settle,” he commented.

The Building Society Association’s chairman Dick Jenkins implored government to set the tone and framework for the UK’s economy to thrive.

Mr Jenkins said: “The greatest concern for the UK economy and something that affects financial market sentiment and ultimately interest rates is uncertainty.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, suggested little is likely to change in the short-term.

“Swaps are falling on the back of the outcome and it is likely to have put back any interest rate rise further still.