Interest Rates – The Next 18 Months

If you blinked this week, or if you just don’t follow the Central Banks of the World more closely (what are you playing at?) then you might have missed the fact that the Bank of Canada, and the European Central Bank, both cut their interest rates. The first “major” central banks to do so, in this current cycle of inflation-combatting rate hikes which started in late 2021 or early 2022, depending on how asleep at the wheel those banks were.

What happened? In a nutshell, Covid was a gigantic stimulus gun, pumping trillions into the world economy – that money then needed to find a home, central bankers and economists were lazy after 10+ years of ZIRP (zero interest rate policy), and all thought “well, rates can’t go up. The economies couldn’t afford it”.

Then inflation happened, then rates HAD to go up, then those economies afforded it against all the odds. And they all lived happily ever after. The end.

OK – this isn’t a fairy tale. But – it is fair to say that if you’d asked 100 economists or central bankers to predict the interest rate in the middle of 2024, in the middle of 2021, none would have been at or above the current rates of interest. No chance. However, the wheels haven’t come off yet.

Why do we care about those central banks? Well, because traditionally it is accepted that the Bank of England and the ECB “Follow the Fed”. This is not really true, like most “accepted facts”. Let me reframe it. When something global happens, the central banks tend to move together in their response. That makes sense. 2008 – Great Financial Crisis – global. Covid – global. NOW though – because of different policy responses during Covid – there is much more likely to be divergence than for a long time.

This is already uncharted territory – the ECB has only EXISTED for 25 years and this is the first time ever that it has beaten the Fed to a cut. The Fed “won’t care” – but they will. The prevailing wisdom now is that the Bank of England CAN’T cut in June for fear of looking political, when they are supposed to be independent. I also think there’s enough evidence for them to still be very cautious about a cut, but I do think a cut in August looks very likely.

Why? It’s difficult. The central banker’s job is to predict 6-24 months into the future, and act accordingly. Of the major banks, ONLY the Bank of England sees inflation below 2% in 3 years’ time. That’s based on 6 cuts between now and then (the market implied path at the last Bank meeting). That 3-year point is the one that really matters, and +/- 0.5% is acceptable in terms of tolerance. That might well be trending downwards, and if – in August, since they only produce a proper report once a quarter – it is, then a cut will definitely be on the cards.

It would favour the UK to decouple from the Fed in this instance, to be honest. This is predicated on my analysis which suggests that the USA has much more of an inflation problem to deal with, from here, as at today, than the UK does. This would mean higher rates for longer as a rule, OR an acceptance of inflation >2.5% for quite a while (or even 3%).

That coupling is keeping UK gilt and swap yields high – and we care, because those are the numbers upon which the mortgage rates are truly based. Best Ltd company BTL at the moment nears 6% interest (if you amortise arrangement fees and add them to the loan) – best personal name is more like 5%, but that combined with Section 24 won’t help you. A proper decoupling from the US – combined with the right conversation and communication, which is definitely not Andrew Bailey (the Governor)’s speciality – could talk yields down 0.25% or more in this instance.

What does this mean? I am personally still taking fixed rates now and managing the rate down during the process if it does come down. I expect yields to come off about 0.5% by the end of the year, if this plays out as expected from hereon in. Labour being elected and making financial missteps – which anger the bond markets – looks like a racing certainty (in terms of being elected) but highly unlikely with the missteps – Rachel Reeves is a credible economist. She will turn the air blue in many of the households of the top 25% – I’m sure – with her planned tax hikes (12-14 was the number I heard more than once today). That will be from council tax to capital gains, most likely – to prepare you.

Sitting and waiting for rates to come down looks like a fools’ errand. Taking a 2-year fix hoping for better rates in 2 years time? All being equal they WILL be lower, but what’s the price for the next 2 years in terms of all the frictional costs of the loan, and then the valuation and solicitors? You are unlikely to be better off unless you really think interest rates will crater (that was a popular opinion in 2022 but very few people seem to be holding that opinion today).

Get on and fix, is my mantra at this time. If it doesn’t stack up – sell it if you can’t convert to HMO/SA with a fast payback and leave yourself with a great asset at the end of it. Brutal. Savage. Quick. Effective. BSQE.

*Rates in 6 months – 5yr gilt 3.5%ish. 12 months – 3.25%ish. 18 months – 3%ish. Plus or minus half a percent. Any big shocks to the system, wars, pandemics, hamsters chewing through the power grid – all bets are off.

Interested, as always, to hear other opinions.

*Add 1% on for buy to let personal name products, add 2% on for limited company buy to let. Rule of thumb!

Share This Article