John Charcol: A quarter point today should do the trick says Ray Boulger

Increase of only 0.25% after MPC sees Inflation Report is good news

US economy still deteriorating on the back of sub-prime mortgage problems.

Ray Boulger of John Charcol, the UK's leading Independent Mortgage Adviser, comments on today's decision by the Monetary Policy Committee (MPC) to increase Bank Rate by 5.25% to 5.5%.

"Today's 0.25% increase in Bank Rate was so widely expected that any other decision would have been a major shock and would therefore have indicated that the MPC had received some significantly different economic information to that currently in the public domain.

Forecasting Bank Rate decisions in the months when the Quarterly Inflation Report is published always has the additional problem that the MPC has access to most or all of that report before making their decision, whereas it is not made publicly available until six days after the MPC's decision.

"The forecast in February's Inflation Report was that the Consumer Price Index (CPI) would fall back to around the target level of 2% by the end of this year, assuming that Bank Rate increased to 5.5% as anticipated by the market and that it would peak in this cycle at that level.

The fact that the MPC considered a move to a 5.5% Bank Rate was appropriate for meeting their CPI targeting objectives, after having sight of this month's Quarterly Inflation Report, and probably also at least a strong indication of last month's CPI figure (which is likely to have retreated below 3%), suggests that the May Quarterly Inflation Report will not diverge significantly from February's.

"The key question now is whether 5.5% will indeed prove to be the peak.

The publication next Wednesday of the Quarterly Inflation Report will provide the best guide on this and so it seems sensible to hold off on drawing too many conclusions until then.

However, there are increasing signs that last three Bank Rate increases are impacting on the housing market and in particular the number of new mortgage approvals for purchases has fallen over the last few months.

The actual amount of lending has increased but this simply reflects higher loan sizes as a result of the 10% or so increase in prices on an annual basis.

One needs to treat housing market statistics with caution over the next few months because of distortions caused by the planned introduction of Home Information Packs (HIPs) on 1 June." What should borrowers do now? Boulger continues: "The market is fully discounting another Bank Rate increase to 5.75% and so this is already priced into most fixed rate mortgages.

However, many borrowers will still prefer a fixed or capped rate for the budgeting certainty and consequent peace of mind they offer.

"As Bank Rate is probably close to its peak borrowers who don't need the security or comfort of a fixed rate are likely to get better value from a tracker mortgage, so as to benefit from any Bank Rate falls next year.

However, there are still some competitive 2 year fixed rates on offer below 5.3%, which will be good value even if Bank Rate falls back to 5%.

Good two year trackers start even lower at Bank Rate - 0.81%, i.e a new rate of 4.69%, although to get this rate there is a 1.25% fee, and good two year Buy-to-Let trackers start close to this level at Bank Rate - 0.7%, i.e a new rate of 4.8%, with a fee of ?1,499.

For borrowers who prefer a deal with no early repayment charges we can offer exclusive 3 or 5 years tracker mortgages with a droplock option just below Bank Rate." Borrowers keen to see how much they could save on their mortgage repayments should either contact John Charcol on 0800 71 81 91 or post a copy of their existing mortgage offer marked clearly "Remortgage Check" to John Charcol, Holbrook House, 10-12 Great Queen St, London, WC2B 5DD.

This service is obligation free and consumers are in no way required to act upon the recommendations given.

Borrowers should contact 0800 71 81 91 or visit www.johncharcol.co.uk.

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