fundamental alert

U.K. Banks Remain Hesitant to Lower Mortgage Rates, Stoking Bets For Additional Rate Cuts by the BoE

Friday, 07 November 2008 06:48:33 GMT  |  DailyFX Research

Yesterday's 150 bp BoE rate cut was followed by a withdrawal of most tracker mortgage deals from the market. Highlighting how the recent aggressive central bank rate cuts are failing to feed through to households, most U.K. banks pulled their tracker mortgage products from the market yesterday, and mortgage brokers warn that the few remaining are likely to be withdrawn over the weekend. With banks struggling with losses, they are likely to seek to gain some profit from Thursday's sharp rate cut, despite urges and threat from Prime Minister Brown and Chancellor Darling to pass on lower rates to households and businesses. Indeed, only Lloyds TSB and Abbey have said that they will pass on the 150 bp rate cut in full to their mortgage clients, while HSBC, Barclays, RBS and Nationwide said they are reviewing whether to pass on the full BoE cut to mortgages borrowers. The failure for recent rate cuts to feed through to households and business suggests that the risk for a severe and drawn-out recession continues to linger and that the BoE will have to deliver larger rate moves to achieve the desired impact on the credit market.
Meanwhile, the latest Reuters poll for the ECB predicts a 50 bp cut at the December meeting, and quarter end rates of 2.50% in Q2 and 2.00% in the reminder of the year. We agree that the ECB is likely to cut rates by 50bp at the next meeting, but feel that the central bank is more likely to front load the easting cycle than the poll suggests. We would therefore expect the bulk of next year's tightening to occur in Q1 and are looking for a quarter end rate of 2.0% that quarter. Rates are likely to trough at 1.75% in the second quarter. This would be a record low for the ECB, but with growth and inflation falling rapidly the ECB should have room to ease without jeopardizing inflation. The frontloading of the cycle would also give the ECB room to start hiking when and if inflation starts to pick up again without throttling off growth.

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