Chesterton Humberts discusses the Forward Guidance statement from the Bank of England; what it is and how the most recent update affects you.
Introduced by Mark Carney, the governor of the Bank of England, in August last year, Forward Guidance is a statement issued by the Bank of England giving information about the future direction of policy, particularly interest rates.
What is the point of forward guidance?
Forward Guidance aims to give longer term security to both lenders and borrowers about the future direction of interest rates by stating the criteria which will trigger a change in the Bank Rate, currently set at 0.5%. The thinking is that by giving a longer lead-in time to interest rate changes via these criteria, the banks will have more certainty that they will be able to borrow from the Bank of England at a stable rate for a reasonable period of time which will in turn lead to greater stability in lending (and savings) rates to households and businesses.
Before Forward Guidance, it was something of a guessing game as to whether Bank Rate, set by the Bank’s Monetary Policy Committee (MPC) each month, would change.
How does the bank rate affect me?
Bank Rate is the interest rate at which the Bank of England lends to commercial banks and which in turn influences the interest rates that banks charge their customers for loans and mortgages and pay their customers for savings.
So what’s happened?
Last August, Forward Guidance stated that the Bank of England would, amongst other indicators, look at interest rates when unemployment fell to seven percent, which was expected to happen in 2016. However, the economy has recovered more quickly than most experts expected, with the unemployment already nearing that rate. This led to concerns that this would automatically lead to a rise in Bank Rate and thereby affect borrowing rates. The Bank of England has subsequently issued a revised Forward Guidance document.
What does the revised forward guidance say?
The revised Forward Guidance statement appears to be designed to clarify that changes in Bank Rate will not be linked to any one single criterion (i.e. unemployment) but rather to an assessment of the broader health of the economy. It represents a more specific attempt to reassure lenders and borrowers about future interest rate direction by emphasising that “despite the sharp fall in unemployment, there remains scope to absorb spare capacity further before raising Bank Rate.”
So what’s happening to interest rates?
The revised Forward Guidance states that any increases in Bank Rate will be gradual and likely to remain materially below 5%, even when the economy is back on its feet. However, it qualifies this by confirming that “the actual path of Bank Rate over the next few years will, however, depend on economic developments.”
Should borrowers be concerned?
Whether or not the revised Forward Guidance succeeds in giving more comfort to households and businesses alike, it should be noted that even if Bank Rate remains unchanged at its current level this is not a guarantee that high street banks won’t raise the interest rates they charge their customers whenever they choose to. Indeed, interest rates on credit cards have been creeping up since last autumn and variable mortgage rates also rose last year. While Bank Rate is clearly an important indicator, it would be advisable to monitor other money market interest rates, such as LIBOR and SWAP rates, which might influence commercial bank lending rates.
Key Contacts Agency Advise
Chesterton Humberts is ideally placed with a network of over 50 offices across London and the UK and 21 overseas offices. To talk to us about selling or letting your property, please call us on +44 (0)20 3040 8339.
For mortgage advice Chesterton Humberts recommends Springtide Capital, an independent mortgage broker which can provide bespoke mortgage solutions. Please contact Henry Knight on +44 (0)20 3040 4400 | springtidecapital.com
About Chesterton Humberts
Chesterton Humberts is one of the country’s leading property consultancies and estate agents, offering a full range of property-related services and backed by over 200 years of experience and an unparalleled commitment to providing the highest levels of service.
Originally established as a small land agent in 1805, the company grew to become one of the most recognised and highly respected names in property. Today, Chesterton Humberts operates a network of over 75 international offices offering advice on all areas of property from residential sales, lettings and property management through to rural estate management, finance, commercial investment and professional services.
In addition to having one of the largest networks of offices in London and a further 27 offices across the rest of the country, our clients benefit from our international office network, which stretches across five continents and 12 countries and ensures that their properties are exposed to the largest possible marketplace.