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Base Rate set to fall to zero

June 29th, 2016

An economist at investment bank UBS has suggested that the Bank of England’s Base Rate of interest could fall to 0% by the end of the year, following last week’s Brexit vote.

David Tinsley said that the UK’s vote to leave the EU indicated “sharply lower growth, a large drop in the pound, and further easing from the Bank of England” in the next six months.

With the pound falling to a 31-year low against the dollar on Monday, it appears that Tinsley’s predictions are borne out of fact rather than fiction, and with inflation already low, there appear to be few options left for the central Bank in order to ease the economy.

“Base Rate has been at its current historic low of 0.5% for over six years now, following the 2008 financial crisis” said Taj Kang, Business Development Director at Contractor Mortgages Made Easy. “Many experts had predicted a gradual increase from this throughout 2015, however that was not to be, and last week’s Brexit vote will likely cause a period of uncertainty for the UK’s finances, whilst the market adjusts to exit plans.”

Following the referendum last week, exchange rates, the stock market and annuity rates have all suffered, wiping many thousands of pounds from the value of some investments.

“Were interest rates to fall, savers would be hit the most as the return on their nest eggs diminish” added Kang. “Whilst not good news for those with large sums in reserve, it would mean potentially better deals for borrowing.”

Whilst this could spell better rates for those arranging finance, one area that is likely not to benefit, in the short term at least, is the mortgage market.

“We have already encountered several clients who either have, or are considering, putting purchases on hold pending any turbulence in the economy” said Kang. “This would indicate that the housing market is likely to stagnate somewhat at least in the short term. Those who were thinking of buying this year may now reconsider in light of last week’s events.”

While many mortgage rates are unconnected to the Bank of England Base Rate, those which track it will see a benefit should rates fall further. With the majority of mortgage rates, at least recently, being fixed rates, these are likely to remain unaffected, or worse still could rise.

“The cost of a fixed rate mortgage is linked to inter-bank swap rates, essentially the cost at which the bank borrows the money itself” explained Kang. “These have been steadily declining this year, leading to some of the historically low fixed rates on offer presently.”

“Should swap rates suffer from some fluctuation, however, it may be some time before fixed rates return to their present level, if ever. A longer term fixed rate in particular at present could be a wise consideration.”

Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy

Media Contact: Ratchelle Deary, Public Relations Manager

Tel: 01489 555 080

Email: ratchelle.deary@contractormortgagesuk.com

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