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Ask the mortgage experts Home » Mortgage News » John Charcol Market Report Mortgages & me Ray Boulger's blog John Charcol Market Report John Charcol Index Thursday 21st March 15th Feb 2013 - Market Report Press Room Central Bank Rates 21st Feb 2013 - Market Report Glossary Bank Of England rate - on hold at 0.5% and no increase in QE - (next decision 7th March 2013 - Market Report 4th April) 14th March 2013 - Market Report ECB - on hold at 0.75% - (next decision 4th April)

The March MPC minutes showed that members were still at odds over whether to use more QE to try and boost the economy. Once again outgoing governor Sir Mervyn King and two others , voted for more QE, but were outgunned by the remaining six members. One member flagged a concern over the weakness of the pound, which has dropped by some 8% against the dollar since the start of the year, primarily due to fears about the strength of the UK economy. Ian McCafferty said that further falls in sterling could produce further rises in inflation, which could have "damaging" consequences. One economist commented: "If we get a new remit or a different remit [for the MPC] from the chancellor today, the balance for monetary policy could well change. But there is nothing from today's minutes that screams out that we are definitely going to get more QE." Following the budget, the Bank of England has been given the additional remit to consider using unconventional monetary tools to boost the economy. The change to the central banks remit came after the 2013 GDP forecast was cut again. It means that the Bank will now provide explicit guidance on how long it will keep its monetary policy loose, which is similar to the US Fed. The assumption is that by providing an indication about how long interest rates will remain low will weigh on longer-term interest rates and thereby lower borrowing costs for households and businesses, and help improve broader economic conditions. Current Governor Sir Mervyn King and incoming Governor Mark Carney have agreed to the new remit. The move has come as the government, which is committed to fiscal austerity, wants the Bank to do more to help the economy grow, rather than just focusing on inflation. Reaction to the new remit was calm, "The change to the remit doesn't go quite as far as some in markets had speculated, and therefore the reaction from the currency and gilts has reflected this," said one economist, adding "It does, however, potentially give the Monetary Policy Committee more flexibility to ease monetary policy further," he added. Banks / Building Societies Accord and HSBC have become the latest lenders to withdraw completely from interest only. Accord includes the rest of the Yorkshire Building Society Group, and comes at a time when other lenders are focusing on market innovation, rather than less choice. The Co-op Bank has revealed it made a loss last year and will sell an insurance unit to rescue the deal to take over the Lloyds Banking Group branches they’ve agreed to buy. The bank lost £673.7million in 2012, compared to a profit of £54.2million in 2011. The bank also revealed that its losses on bad loans had risen to £474million during the year from £121million in 2011. Also last July, the Co-op agreed to buy 632 Lloyds branches, however technical issues relating to computer systems, along with the state of the economy have stalled the deal so far. Co-op agreed to pay £350million upfront and up to an additional £400million based on the performance of the combined business to take over the branches. The planned sale of the general insurance arm is in addition to the announced sale of its life insurance business to Royal London Mutual Insurance for £219million. "We're getting in shape to do it if we can," Co-op’s chief executive said. "We're clearing the decks in order to take advantage of the [Lloyds branch] acquisition if we decide to go ahead with it. We're trying to conclude this transaction in very difficult economic times. That's what makes it more difficult. We're trying to establish what the risks are and to mitigate those risks." It sounds like they’re looking for a reason to pull out of the deal. UK Housing / Mortgage Market In the Budget the Chancellor has announced Government plans to launch a £130billion mortgage guarantee scheme and inject a further £3.5billion into shared equity loans under a new scheme called “Help to Buy”. The new scheme will allow all homeowners with a small deposit to access loans backed by the Government, and while it is similar to NewBuy, it is not limited to new-build properties. The scheme

converted by Web2PDFConvert.com will launch at the beginning of 2014 and will run for three years, and as part of the plan the Government will offer a guarantee of up to 15% of the purchase price, with the borrower putting down a deposit of between 5% and 15%. Lenders will purchase the guarantee from the Government, with the price to be decided at a later date, and partly determined by the LTV of the mortgage. The guarantee will last for seven years with lenders taking a 5% share of any net losses above the 80%, to hopefully ensure lenders do not lend recklessly. The Treasury has said that it doesn’t expect its liability to be anymore than £12billion. A participating lender will pool the loans they wish to place in the scheme and the Government guarantee will apply to the pool. Lenders will not have to offer a guaranteed mortgage and may choose not to use it, according to the Government. Mortgage brokers have called the move a "significant step forward" for buyers, and estate agency has claimed that more than 600,000 home sales could be supported by the new policies, while another said it would be an extra 25,000 sales per year over 3 years. However here are questions over whether the new measures will help more second home buyers, rather than their intended target, and some economists are concerned that the new schemes would just push up house prices. However the Council of Mortgage Lenders (CML), warned that it was the details of this scheme that would determine whether such capacity was reached. "Without capital relief, and depending on the size of the fee, the cost of the commercial fee that lenders will have to pay to gain the benefit of the scheme could make the scheme uneconomical," the CML said. John Charcol’s Ray Boulger said that the policies could unclog some of the blockages in the housing market, and that prices were more likely to go up by 3% to 3.5% this year, rather than 2%, as a result of the moves. However Capital Economics, claim that it will artificially increase house prices and added that: "At best, it will just be irrelevant," he said. "People will have more money with which to buy the same number of houses, the same number of people will live in them and the same number of people will be excluded. It is just that they will be excluded at a higher level.” UK The Office for Budget Responsibility (OBR) has slashed the 2013 GDP forecast from the 1.2% predicted in December to 0.6%. The shock reduction was announced at the start of the Budget, and were blamed by the Chancellor on lower-than-expected exports. The OBR also revealed that the chancellor had failed to cut government borrowing this year, with the figure of £121billion being the same as the previous year (excluding certain one-off factors). The chancellor said he was going to "level with people about the difficult economic conditions we still face", and admitted that the recovery was "taking longer than anyone hoped". 2014’s forecast has also been cut, from 2.0% in December to 1.8%, while those for 2015 to 2017 remain the same. Interestingly the OBR isn’t expecting a contraction in Q1, which means avoiding the ‘triple-dip’ recession, though it does expecting the eurozone to stay in recession this year. "While less than we would like, our growth this year and next year is forecast by the IMF to be higher than France and Germany," the chancellor said. Inflation rose slightly in February according to the ONS. CPI went up to 2.8% from 2.7% in January, while the RPI actually dropped to 3.2% from 3.3%. The ONS said the biggest upward factor was increases in domestic fuel bills. For the first time the ONS has published some new inflation measures, following last years decision that the RPI calculation wasn’t up to scratch. RPI is still published but is no longer an official national statistic. The new RPIJ, showed the annual rate of inflation in February was 2.6%, down from 2.7% in January. Most economists are now of the opinion that price rises will keep rising over the coming months, partly due to the drop in the pound, which makes buying goods in other currencies more expensive. Capital Economics have predicted that CPI will reach 3.5% in the summer, on the back of higher food and petrol costs: "While it should ease back thereafter, the rise in import prices likely to result from the recent fall in the pound could slow that fall." The ONS has also reported that unemployment went up by 7,000 to 2.52 million between November and January. There was some good news as the number of Jobseeker's claimants in February fell by 1,500 to 1.54 million, the lowest level since June 2011, and the overall unemployment rate held steady at 7.8%. The bad news though is that the number 16-24 year old out of work reached 993,000 over the three months, which puts youth unemployment at 21.2%. Also average earnings rose 1.2% over the three months, compared to the same period in 2011-12, which with the CPI running at 2.7% means a drop in real terms. Also from the ONS is news that retail sales rose 2.1% in February compared to January, mainly thanks to a rise in sales of computers and technology, and goods bought online. Sales were up 2.6% on February 2012, with an increase in both volume and value. One economist said: "Retail sales were strong probably because prices were low. And when there are smaller-than-normal price increases in things like clothing, people spend more, so that's understandable. Will it avoid a triple dip [recession]? I doubt it. It just makes it a closer call." Europe Cypriot politicians appear to have dropped the highly unpopular levy on bank deposits in a new bailout plan. The latest move follows outrage over the earlier bailout plan to tax all bank deposits, which has seen Cyprus' banks remaining closed

converted by Web2PDFConvert.com all week to prevent mass withdrawals. The bank are to stay closed until next Tuesday (26th). The government has to find 7billion euros to get a 10billion euro EU-IMF loan, and Cypriot officials are now proposing a state investment fund and special bond issue to raise 5.8billion euros. The further 1.2billion would be raised through privatisations and by increasing capital gains tax and the corporate tax rate. Details are still being worked out, and it is not clear if it will be put to a parliamentary vote on Thursday (21st) . The ECB has warned it may halt emergency funding on Monday (25th) if Cyprus fails to come up with a viable rescue plan by then. Ordinary citizens are finding it increasingly difficult to make everyday financial transactions as cash and credit is drying up fast. A senior government MP, said the bank levy would remain in some form, as without it Cyprus could not raise all the money it needed. There is increasing speculation that the new Cypriot plan will include Russian help, as Russia has multi-billion dollar investments in Cyprus and it is estimated that Russians, hold between a third and half of all Cypriot bank deposits. The Russian PM has attacked the eurozone's bailout plan, accusing EU leaders of behaving "like a bull in a china shop". The Cypriot Finance Minister is also in Moscow for a second day to negotiate assistance, and analysts are speculating that Russia may provide more funding in return for interests in Cyprus' offshore energy fields. The banking sector dominates Cyprus' economy and if a viable rescue can’t be agreed then there is a risk that the island will have to abandon the euro. US The Fed has said the economy has strengthened "moderately" but still needs stimulus measures to underpin recovery. Their statement released after their two- day meeting, confirmed it would keep its policy of buying $85billion a month of Treasury bonds and mortgage-backed securities. The Fed said it wanted to see signs of a long-term fall in unemployment, and added that they continued "to see downside risks to the economic outlook". They also lowered 2013’s GDP forecast slightly, with the Fed now predicting growth of 2.3% to 2.8% this year, compared to Decembers estimate of 2.3% to 3%. The Fed also noted that the employment market had improved, consumer spending and business investment had increased and the housing market had strengthened, however they still don’t expect unemployment to fall to 6.5%, from its current 7.7%, until 2015. Some positive signs of recovery in the US economy have been seen with news that home sales are running at a three-year high. The National Association of Realtors (NAR) has said that sales of existing homes in February reached their highest annual rate since November 2009. They added that sales had gained 0.8% since January to reach an annual pace of 4.98 million units, with the rise all coming from sales of apartments and condominiums. Sales of family homes fell very slightly. The NAR said low interest rates, improvement in employment and pent-up demand were underpinning the market's continuing expansion. Also the Conference Board index of economic indicators rose 0.5%, with eight of the 10 components on the index increasing in February, compared with five in January and six in December. The Conference Board, said: "The US economy is growing slowly now, and with this reading increases hope that it may pick up some momentum in the second half of the year." The Rest Of The World Japan has posted a trade deficit for an eighth consecutive month, once again highlighting the economic challenge being faced by the new government. February’s exports dropped, while imports climbed, which meant the country posted a deficit of 777.5billion yen. Japanese exports which is a key driver of growth, have slipped in seven of the past eight months. Analysts said the sector was facing many challenges and the recent drop in yen was unlikely to provide a boost, however they also pointed out that many of Japan's leading exports has been shifting production overseas over the past years, and as result, their shipments from Japan had not been rising. Also demand for Japanese goods has been falling in key markets such as the EU and China, and the weaker yen was unlikely to help on those fronts. Exports to the EU have fallen for 17 straight months as the sovereign debt crisis continues to hurt consumer demand. The latest HSBC Purchasing Managers Index (PMI) has shown that manufacturing activity in China picked up in March. The index rose to 51.7, from 50.4 in February. The March figures are seen as a better indicator for the sector, as the Chinese New Year holidays skew the data in January and February. HSBC China economist said the rebound in the sector was fuelled by "stronger new orders and production growth. This implies that the Chinese economy is still on track for gradual growth recovery.” Earlier this month, Chinese exports jumped 21.8% from a year earlier, boosted by strong demand from the US and South East Asia. Also industrial output and retail sales also increased in January and February, from a year earlier, although the pace of growth in these sectors was slower than many analysts had forecast. Markets, Swaps. Libor, Gold, Sterling. UK Swap Rates Date 2 Year 3 Year 5 Year 10 Year 25 Year 0.62 (-0.01) 0.68 (-0.02) 1.00 (same) 1.98 (+0.01) 3.04 (-0.04)

converted by Web2PDFConvert.com Wed 20th 0.62 (-0.01) 0.68 (-0.02) 1.00 (same) 1.98 (+0.01) 3.04 (-0.04) Tues 0.63 (+0.03) 0.70 (+0.02) 1.00 (-0.01) 1.97 (-0.03) 3.06 (-0.04) 19th

Mon 18th 0.60 (-0.02) 0.68 (-0.03) 1.01 (-0.04) 2.00 (-0.05) 3.10 (-0.04)

Fri 15th 0.62 (-0.01) 0.71 (-0.01) 1.05 (-0.02) 2.05 (-0.03) 3.14 (-0.04)

Thurs 0.63 (+0.02) 0.72 (+0.02) 1.07 (+0.02) 2.08 (+0.01) 3.18 (+0.02) 14th

Wed 13th 0.61 (+0.01) 0.70 (+0.02) 1.05 (+0.01) 2.07 (same) 3.16 (+0.02)

Tues 12th 0.60 (same) 0.68 (-0.02) 1.04 (-0.03) 2.07 (-0.03) 3.14 (-0.02)

Mon 11th 0.60 (-0.03) 0.70 (-0.03) 1.07 (-0.04) 2.10 (-0.04) 3.16 (-0.04)

Fri 8th 0.63 (same) 0.73 (same) 1.11 (+0.01) 2.14 (+0.03) 3.20 (+0.03)

Thurs 7th 0.63 (+0.02) 0.73 (+0.03) 1.10 (+0.03) 2.11 (+0.05) 3.17 (+0.06)

UK Libor Rates Date 1 Month 3 Months Libor 6 Months Libor 12 month Libor Wed 0.49 (same) 0.51 (same) 0.60 (-0.01) 0.91 (same) 20th

Tues 0.49 (same) 0.51 (same) 0.61 (same) 0.91 (same) 19th Mon 0.49 (same) 0.51 (same) 0.60 (same) 0.91 (same) 18th

Fri 15th 0.49 (same) 0.51 (same) 0.60 (same) 0.91 (same) Thurs 0.49 (same) 0.51 (same) 0.60 (same) 0.91 (same) 14th Wed 0.49 (same) 0.51 (same) 0.60 (same) 0.91 (same) 13th Tues 0.49 (same) 0.51 (same) 0.60 (-0.01) 0.91 (same) 12th Mon 0.49 (same) 0.51 (same) 0.61 (same) 0.91 (same) 11th

Fri 8th 0.49 (same) 0.51 (same) 0.61 (same) 0.91 (same) Thurs 0.49 (same) 0.51 (same) 0.61 (same) 0.91 (same) 7th

Financial Markets – 14th March – 21st March

Index 14/03/2013 This Week % Change FTSE 100 6,530.96 6,388.55 -2.18% Dax 8,053.54 7,932.51 -1.50% CAC 40 3,867.23 3,774.85 -2.38%

Index 14/03/2013 This Week % Change Dow Jones 14,522.26 14,462.12 -0.41%

S&P 500 1,561.08 1,552.07 -0.57% Nikkei 12,381.19 12,635.69 +2.05% Hang Seng 22,619.18 22,225.88 -1.73% Shanghai 2,270.28 2,324.24 +2.37% Composite

converted by Web2PDFConvert.com Sydney 5,043.80 4,976.80 -1.32%

Gold Price Change % Forex Gold Index $/oz 1613.75 +34.25 +2.16

Gold is measured and sold in troy ounces. One troy ounce equals 31.1035 grams or 480 grains. One troy ounce is equal to 1.09711 avoirdupois ounce - widely used to measure weights in the US and UK.

Pound vs US Dollar and Pound vs Euro

Sterling v Euro 1buys Change % 52 Wk-h 52 Wk-l Euro 1.14850 +0.02700 +2.35 1.27800 1.10650

Sterling v Dollar 1buys Change % 52 Wk-h 52 Wk-l US Dollar 1.51720 +0.01150 +0.76 1.67070 1.44550

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