Why don’t all interest rates move in the same direction?
Source: Bank of England, Investing.com
The November 0.25% cut from the Bank of England has not fed through to your prospective remortgage interest rate. Some lenders are doing the complete opposite of the Bank and pushing their rates upwards. We explain more about the correlation between the Bank of England and interest rates below.
Interest rates and the Bank of England
The Bank of England doesn’t control interest rates in the way many people may think. The Bank does manage short-term interest rates by setting its Bank Rate, which is the rate it pays on the money it holds for commercial banks. By fixing a minimum fully secure return that the commercial banks can collect, the Bank of England then influences what those banks can charge for lending.
The main takeaway here is that the Bank of England is setting a short-term rate which in theory varies every six weeks, when the Bank’s Monetary Policy Committee meets to set rates.
Longer term interest rates are set by markets, markets that will take account of the current Bank Rate. However, if a fixed rate for five years is under consideration, then the market is essentially estimating the path of Bank Rate over the next 60 months.
That forward-looking calculation has a vast spectrum of factors built into it, like any medium-term financial forecast. The result can be that as the short-term Bank Rate is cut in response to current economic conditions, longer term rates increase because of the markets’ views of longer-term prospects.
Bank rates
The graph above demonstrates how the Bank Rate and the yield on five-year fixed rate government bonds have moved between mid-July and mid-November in 2024. The yield on the five-year gilt has risen by about 0.4% despite a Bank Rate that declined 0.5% over the period. That portrays the market changing its mind about how fast and far the Bank will cut rates.
If your mortgage is due for refinancing soon, you may find yourself hopefully observing the markets for indications of that change of mind. For further guidance on the property market and what this means for you, our Mortgage team are happy to help, contact our team today.
Important Note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes only and should not be considered financial advice.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
