Martin Lewis: “But look here. This is your base rate – not moved. And yet, in the last six months, we’ve seen those fixed rates go higher. And it is no coincidence this is the start of the Middle East crisis.
“Now, what you need to understand about fixed rates is the rate you can get a new fix at isn’t based on the base rate, but it’s effectively based on the market’s sentiment of what is going to happen to interest rates in future, known as the swap rates. But we’ll keep it simple.
“So, let’s just have a look at those right now. Here we are. I’ve concertinaed the graph a little bit so you can see. This is where the market factors in where interest rates are going. It is, in fact, saying almost certainly in November, next month – remember, remember the 5 November – we’re going to see a quarter of a percent rise. Got an economist with us, Sebastian: Quarter of a percent in November?”
Sebastian Burnside, chief economist at NatWest: “Highly likely.”
Martin: “Highly likely. Never say yes, for an economist. Highly likely, yes. I mean, very likely that that’s going to be happening and then the market says it’s going up by about 1% from where it is right now. And that’s what’s driving the price of these fixes going up over the last six months, because inflation is up, because of a supply-side issue, from what’s going on in the Middle East.
“But this is interesting. This is the forecast from an economist, Capital Economics. Look, they say, ‘Hold on a second. We don’t actually agree with the markets. We think the markets have overpriced it. We think it’s only going to go up two times, by about half a percent, and then it’s going to start coming down. Now, we have our own economist with us, so let’s put him on the spot. Which one of those two lines do you agree with?”
Sebastian: “Well, what’s happening here is Capital Economics, and all the other forecasters, are trying to guess what will happen, whereas the market is trying to show what might happen as well. So, because we can never be sure about what’s going to happen to interest rates, because we could never be sure what’s going to happen in things like the Middle East conflict, then there’s a much wider spread of scenarios which the market is taking place there.”
Martin: “So that means you’re with Capital Economics, yeah?”
Sebastian: “That’s right.”
Martin: “So you’re here. And this is effectively then pricing in risk of it getting even worse, rather than a prediction. So this is a prediction, and this is a pricing in of risk, and that’s the difference between the two. Now, what is fascinating about that, and this is brain-twist time, everyone. Just get your head around this. I’ll try and take it slow.
“This has gone up based on what the markets are pricing in may happen. If what Capital Economics is predicting does happen and the rates do not go up as much as the market has priced, then we could be in a perverse scenario, where base rates go up, but because they don’t go up as much as the markets expect them to, fixed rates get, not much, but get a little bit cheaper, edge down. Kate, that could happen? Our mortgage broker.”
Kate Fuller, mortgage adviser at the Mortgage Advice Bureau: “Yep, that could definitely happen.”