Lucy Waters - Managing Director, Aria Finance
After three years of perpetual economic crisis, you could almost hear markets breathe a collective sigh of relief following last month's inflation announcement.
Not only did inflation fall again in June, it came in 0.3 percentage points lower than economists had expected.
That may seem like a slim and fairly trivial margin but in terms of symbolic importance, it's difficult to understand its significance. It means that, finally the UK is following the same downward inflation path as the US and the eurozone, whereas previously we had been seen as an international outlier.
Of course, at 7.9%, inflation in the UK is still markedly higher than it is in other major developed economies, such as the US (3%), Japan (3.3%) and even Germany (6.4%). Let's also not forget that inflation remains nearly four times higher than the Bank of England's 2% target.
However, for the first time in months, it feels as if the winds is starting to change direction - even if only slightly - and a marginally more positive narrative is starting to emerge. The change of pace was so unexpected that markets are now pricing in a terminal rate of 5.8%, rather than the 6.5% predicted before the inflation announcement.
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That has brought some much-needed stability to swap rates, allowing some lenders to sharpen up their product ranges over the past couple of weeks. I have read in various places recently that this may spur on other lenders to follow suit. However, I think it might be a little early to make that call.
That's not to say that we won't see any lenders coming out with rate reductions in the near future. I just think the movement is more likely to be from those who had previously priced themselves out of the market.
Despite the improving outlook, we are not out of the woods yet and, anyway, lenders know better than to place too much significance on one set of data. While the economy has proven remarkably resilient, the inflation genie isn't back in its bottle yet and lenders will want to see sustained progress before deciding their next moves.
We only have to go back to January's inflation to see how quickly the outlook can change. Back then, markets celebrated a second consecutive fall in inflation only to be disappointed again the following month when price rises unexpectedly picked up pace once again.
It's also worth pointing out that, at the time of writing, swap rates were only slightly lower than they were the month before. And in fact, they remain higher than they were immediately before the inflation announcement on 19 July.
That suggests to me that there isn't actually a great deal of scope for widespread mortgage rate cuts, except maybe from those lenders on the pricier end of the spectrum. From an operational point of view, there is a cost to lenders when they reprice, meaning they don't want to constantly chop and change their ranges unless they have to.
Therefore, I suspect they will want to tread carefully over the coming quarter or so, or until the inflation picture a little clearer. That said, there might be scope for a softening of pricing towards the back end of the year if inflation continues to fall.
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What does that mean for borrowers? Unfortunately, more confusion. I get asked daily by clients what I predict will happen to interest rates, which I'm sure any broker reading this will be able to identify with. But the truth is, it's almost impossible to call. There are simply too many variables at play and the recovery is far from secure enough to make even an educated guess.
That does mean, however, that mortgages advisers will continue to play a vital role in helping borrowers make sound decisions during what is a highly uncertain time. Make no mistake, it feels good to finally have some good news on the economy. But we might have to keep the Champagne on ice for the time being at least.
