26 June 2024: Borrowers are facing a mortgage challenge

Several thousand mortgage borrowers are facing a difficult choice in the next couple of months as their fixed-rate loans come up for renewal. Before the Bank of England embarked on its cycle of interest rate rises, it was a no-brainer to fix loans for as long as possible to provide some security.

Now, since rates have been held at their current level for over six months, borrowers face a dilemma in deciding whether to pay a floating rate as the bank is likely to cut interest rates in the coming months as banks offer generous deals to entice them to remain loyal to their products.

This uncertainty is weighing on the market and is creating further volatility.

Several banks have offered lower rates, and no-fee deals to attract willing borrowers to shop around. The Banks have shown little loyalty to their customers for a significant period, so to expect them not to shop around is barely justified.

Andrew Bailey has had several Chancellors to build a relationship with during his tenure as Governor, so it will be nothing new when, in all probability, Rachel Reeves takes over in a little over a week.

There have been threats to the independence of the Bank made over the past couple of years, but it is unlikely that Reeves and her new Treasury team will want to rock the boat when they have plenty to get on with.

It may be sensible for the Treasury to be represented on the Monetary Policy Committee and given the upheaval that has taken place over the past few years it is certain that if the Committee was being formed now, the Treasury would be represented.

It is increasingly likely that the new Government will be greeted by the first cut in rates for almost five years. Inflation has fallen to meet the Bank’s target, and even though prices are expected to rise again in the Autumn, a cut may be agreed upon in August since Bailey and his colleagues are still data-driven and do not want to be seen as being overly proactive.

The Labour Party, according to its leader, will target average growth of 2.5% a year throughout the next Parliament. That is an ambitious target, given that several agencies see growth in industrialised nations at 2.3% over the next three years.

In a TV interview that is yet to be aired, Starmer said Under the last Labour government, we grew by about 2.5 per cent, Starmer said. Asked if he was looking to achieve the same, he replied: “Certainly, yes.” This is the first sign of Labour possibly overstretching itself without having the means to back its claims.

The financial market has begun to drift as it awaits the result of the election. Yesterday, Sterling barely changed during the day, remaining between 1.2702 and 1.2670 and closing at 1.2686.

The financial markets are growing impatient with the Federal Reserve. It is not like investors or traders to show patience during periods when Central Banks are deliberately pausing to allow their policies to take effect. The market always believes that more could be done to “hurry along” policy changes that provide the volatility they need to create wealth.

At the start of the year, the economy was at a crossroads as the effect of several months when the Fed Funds rate was held at decades-long highs was considered to see employment levels fall as the Fed pressed the brake on growth to drive inflation lower.

The economy has shown remarkable resilience over the first half of the year, even though growth in the first quarter was significantly lower than it was in the final quarter of 2023.

It was considered almost a certainty that the first interest rate cut would be delivered in March. Then as inflation remained “sticky” that was pushed back to June and the number of cuts expected to take place this year was reduced from four to three.

The FOMC and Jerome Powell have been preaching patience for a considerable time and that patience is wearing a little thin.

At the end of the first quarter, a soft landing was awaiting Powell’s confirmation, but inflation has stayed at a level that is driving speculation that it will not fall much further with monetary policy as it is currently and may require another rate hike to fall to the Fed’s 2% target.

It has even suggested that the Fed should “move the goalposts” possibly raising its target, which after all is self-imposed, to 2.5% or even 3% to remove speculation about a rate hike.

Overall, it would be “highly irregular” for any Central Bank, let alone the Fed which is considered by many as the “daddy of them all” to cut rates when the economy is performing as it is, and job creation is still so strong.

Over the past month or two, Fed officials have been less willing to predict when the first cut in rates will happen, but just this week, there has been a slight change in their level of hawkishness.

Chicago President Austen Goolsbee commented, “If we get more months like what we have just seen in the last month on inflation, coupled with slowing conditions in some of the other parts of the real economy, then you would have to start questioning, should we remain as restrictive as we’ve been?”

“Not yet”, has been changed to “wait and see” in relation to monastery policy. This has led to a fall in volatility in financial markets. Yesterday the dollar index traded inside the rage seen over the previous two sessions. It climbed to a high of 105.79 and closed at 105.63.

The inexorable rise in right-wing Parties across the whole of Europe will receive a huge boost if, as expected, Marine Le Pen’s National Rally Party does as well as expected in the first round of voting in the French Election this weekend.

When Giorgia Meloni swept to power in Italy in October 2022, it was believed that her ironically named “Brothers of Italy” Party would be something of a “flash in the pan”, a product of Italy’s traditional militancy.

The fact that she is still in power, and her approval rating is close to 50%, which is considered high in Italy, stands as a testament to her adaptability.

Now, France is on the verge of beginning a similar journey and questions are being asked about the role that Brussels has played in the region’s lurch to the right.

The expectation of a soft landing in the U.S. and a significant improvement in the Eurozone economy, both driven by rate cuts, is no longer valid. Members of the Governing Council of the ECB have been speaking almost regretfully about how they were “bounced into” a rate cut recently and are unlikely to let that happen again in the short term.

Isabel Schnabel who is responsible for the ECB’s bond-buying programme and is also an unofficial cheerleader for the hawkish arm of the Governing Council, spoke recently of her concern over the Eurozone’s propensity to be affected by economic shock and this means that the ECB cannot pre-ordain when any further rate cuts will take place.

She went on to downplay any divergence in monetary policy between the ECB and the Federal Reserve. “So far, this hasn’t played out that much,” Schnabel told a panel discussion on Monday in Berlin. “The macroeconomy is not all that similar, but on the inflation side, it doesn’t look all that different.”

The expectation for the rest of this year is for the ECB to cut twice more, while the latest “dot-plot” is for the Fed to cut just once.

Such a divergence in monetary policy does not bode well for the euro, which could see its fall accelerate if the ECB cuts again before the Fed.

Yesterday, the single currency fell to a low of 1.0690 and closed at 1.0709.

While the French election is dominating the market, data for business and consumer confidence is due for publication today. It is expected that the recent cut in interest rates will have seen confidence improve considerably, particularly in the consumer sector.

Have a great day!