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BOE Raises Interest Rate

Last Thursday (2 Nov 2017), Bank of England (BOE) governor Mark Carney voted to raise interest rates by 0.25% to 0.50% the first such raise in a decade following a cut of similar magnitude just about a year ago in August 2016 right after the Brexit vote.

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It is a hugely controversial move passed with 7-2 votes from a rate-setting MPC (Monetary Policy Committee), as critics point to the weak wage growth, the pullback in consumer spending and uncertainties arising from UK’s divorce from European Union (EU) which effect has yet to be fully known.  They argue that the rise in inflation in the past year is due more to the drop in value of pound rather than economic expansion.  They call it a mistake which policy makers will have to do a u-turn soon in 2018.

 

In the press conference that followed the BOE decision, the governer acknowledged just as much that the impending outcome of the Brexit talks, a long-drawn process, will very much influence the path of future rate hikes going forward or even cause a reversal.  He said: “We’re going to be in exceptional circumstances for a period of time, certainly until there’s clear resolution of the future relationship, and even then, maybe longer than that”.  However, he and his MPC colleageus see the time as appropriate to initiate a change to a very moderate tightening stance in monetary policy, but the committee re-iterated that all future rate increases will be on a very gradual basis.  They forecast the BOE base rate to hit 1% by 2020 with likelihood of another quarter point increase in 2018 pending the outcome of the Brexit negotiations.

 

I am no economist. But there seems to be a common pattern in the thoughts of central banks be it in US or UK that they cannot wait too long to initiate the tightening process for fear that this inflation monster once awoken will be hard to tame without multiple increases in rates that would ultimately lead to the next recession.  Hence the need to send a clear signal to the financial and bond markets that the process has begun but the increase will be ultra-slow and with the path unclear dependant on labour market conditions or the outcome of Brexit talks in the case of UK.

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This is not necessary a bad thing, as central banks need to ensure a smooth and stable financial market and pre-empting the market through clever messaging is most necessary.  Indeed, sterling initially rises when the rate hike was announced but later gave up all its gains when the market digested the signal as still very much dovish from BOE.

 

On the mortgage front, those tracker rate packages that track BOE base rate would of course be higher, but it is still early days to tell if the banks would soon adjust mortgage rates with a rise in cost of funds.  Lloyds Bank, HSBC, Royal Bank of Scotlands and Barclays indicated a review would be ongoing following the latest rate hike and if this indeed leads to higher mortgage rates in the next few months, it will be negative news for a property market reeling from a stalemate due to Brexit negotiations and the stalling of Chinese money overseas (due to Chinese government control).

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To this end, Asian investors in UK property market may want to look at financing their UK properties from Singapore lenders in SGD which tracks the interbank rate in Singapore known as 3-month SIBOR (Singapore Interbank Offer Rate).  Notwithstanding this rate is projected to rise slowly mimicking that of US fed funds rate, it still hovering in the 1.00 to 1.25 range-bound.  And just like what central bankers are saying globally, it is going to be a very gradual rise up.

 

Speak to our consultants to find out more if you qualify for SGD funding from Singapore lenders for your London property investment.  Another attractive benefit for Brexit bulls out there is that when the pound finally recovers from its lows against the Sing dollar, your loan would also have shrunk in GBP terms.  Caveat – the converse is also true.  For properties in cities outside of London like Manchester which is gaining popularity amongst investors, we also work with our mortgage partner based out of London.  Speak to us today!

 

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with successful careers in banking & real estate before becoming an entrepreneur.
View all posts by Darren Goh

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