Base rate warning could cause fixed rates to soar

Mortgage advisers expect fixed rates to increase by an average of 0.25 per cent over the coming weeks after the Bank of England’s base rate warning caused swap rates to soar.

Delivering his annual Mansion House speech on Thursday, Bank of England governor Mark Carney hinted base rate could rise “sooner than markets currently expect”.

Before his speech, market expectations were that the first increase would come in the first or second quarter of 2015 at the earliest.

But following Carney’s speech, swap rates – which lenders use to hedge potential interest rate increases and are closely linked to mortgage pricing – jumped to levels not seen in up to three years.

On Thursday, two-year swap rates stood at 1.2 per cent. But the next day they went up 15 basis points to 1.35 per cent and continued climbing yesterday to hit 1.38 per cent, the highest level they have been since May 2012.

Over the same time period, five-year swaps increased 11bps to 2.25 per cent, a level not seen since July 2011.

Mortgage advisers say swaps are likely to continue to rise now Carney has warned an increase in base rate is likely in the near future and that fixed rates could increase by up to 0.25 per cent, on average, over the next couple of weeks.

UK interest rates have been held at the record low of 0.5% for another month by the Bank of England.

The size of the Bank’s bond-buying economic stimulus programme was also kept unchanged at £375bn.

The decision was widely expected, despite continued signs of strength in the UK economy.

Last month, the Bank of England reiterated it was in no rush to raise rates, with governor Mark Carney saying they may remain low “for some time”.

However, Mr Carney added the economy had “edged closer” to the point where interest rates would need to rise.

Commenting on the bank’s announcement, David Kern, chief economist at the British Chambers of Commerce said: “The decision to keep interest rates and quantitative easing on hold was the right one”.

And he added: “With annual CPI inflation below target, the MPC can afford to wait before tightening their policy. The strong rise in sterling over the past year, making UK exports more expensive, is an important reason for not raising interest rates prematurely”.

Strong growth

Latest official figures show that the UK economy grew by 0.8% in the first three months of 2014.

Recent business surveys have also indicated that the economy is continuing to enjoy strong growth, and the unemployment rate has fallen to a five-year low of 6.8%.

Despite Mr Carney’s recent comments, minutes from last month’s meeting of the Bank’s Monetary Policy Committee (MPC) suggested some members were softening their stance on raising interest rates.

While all nine MPC members voted to keep rates unchanged, the minutes said the views of some members on raising rates were becoming “more balanced”.

Most analysts do not expect UK rates to rise until the first half of next year