FT Advisor: Market view: Carney's move will boost housing market
Wed 07 Aug 2013
Announcement welcomed amid claims it will lead to greater demand and activity in the housing market.
Mark Carney, govenor of the Bank of England, announced today (7 August) that the Bank of England will keep interest rates low until unemployment has fallen to 7 per cent.
While this does provide greater certainty, Hargreaves Lansdown argued that instead of adopting a US Federal Reserve-style forward policy guidance, it may have injected more confidence to simply state that interest rates will remain low for a specific timeframe.
Those mostly negatively affected by Mr Carney's "proactive" stance will be savers, Danny Cox, head of financial planning at Hargreaves Lansdown, said.
He warned that the bank will likely tolerate above-target inflation over the next few years, meaning real interest rates will remain negative.
Mr Cox said: "Interest rates on cash deposits aren't going to rise anytime soon and certainly not significantly for three years it seems. That said, the Funding for Lending Scheme, which has depressed interest rates further, is due to end next year so there may be a little improvement then, unless it's extended.
"Savers should shop around to ensure they are getting the best deal and use cash ISA to shelter their savings from tax."
Mr Cox added that a prolonged period of low interest rates and an easing of banks' currently strict lending criteria wil improve the mortgage market "and we could already see ultra-low mortgage deals improve further".
Another positive note seems to be that pension investors should benefit from more stable and hopefully rising stock markets.
He said: "Pensions are a long term investment and in most cases investors should keep saving regardless of short term news."
While Richard Sexton, director of E.Surv chartered surveyors, agreed that clear forward guidance on the future of monetary policy will encourage more buyers to the market, he warned that when rates eventually rise it will be a "hammer blow" to existing mortgage holders.
He said: "Rate rises will make mortgages more expensive, but on the plus side it will be easier for first-time buyers to save for a deposit, which is the perennial-and biggest-hurdle that they have to clear in order to realise their dreams of homeownership."
Trevor Greetham, director of asset allocation at Fidelirt Worldwide Investment, added that the Bank of England's new emphasis on job creation and the additional visibility on interest rates sits alongside a range of government policies aimed at making mortgages more affordable.
He said: "This should play well for the government ahead of 2015 elections even if the recovery is an unbalanced one and even if a looser fiscal stance could have created jobs with a less distorting impact on housing affordability".
Peter Rollings, chief executive of estate agent Marsh & Parsons, added: "With his statement today Mark Carney has given the UK's housing market a significant boost.
"This is a highly important statement which will allow lenders to offer attractive fixed rate deals to potential buyers and will surely lead to greater demand and activity in both the resale market and provide a fillip for first time buyers."