Consumer behaviour, including disappointing retail sales and the continued softening of the housing market, all point towards a Base Rate reduction in a few months time says Ray Boulger of independent mortgage broker Charcol.

This is despite the Monetary Policy Committee discussing a possible fall at last month's meeting which some have taken as a sign of an early rate reduction.

Commenting on yesterday’s decision by the Monetary Policy Committee to freeze Base Rate at 4.75%, Mr Boulger said: “Retail sales during the Christmas period, although subdued, were not poor enough to merit a reduction in Base Rate this month. Consumers’ increasing awareness of the ease of making price comparisons on durables, by use of the Internet, is keeping a lid on prices and hence restraining any inflationary pressures."

"The MPC has played a good hand on the housing market and managed to get house prices pretty well where they want them. It is clear that they will not want re-ignite this market with a premature reduction in Base Rate. Whilst a reduction increasingly looks like the next move, getting the timing right will be a difficult judgement.”

What should borrowers do now?

Boulger continues: “The interest rate futures and swaps market, off which fixed rate mortgages are priced, are also predicting that Base Rate has peaked and are factoring in a ¼% fall by the end of the year. In addition to this, most lenders are planning increased or unchanged lending volumes this year despite the general expectation that gross lending will fall by around 8% in 2005. This can only mean intense competition in the market with the consumer the clear winner."

“The need for extra volume this year is enhanced further since many lenders scaled back lending at the end of 2004, not always on purpose, because of the impact of Statutory Regulation. Lenders are likely to particularly target the remortgage market as the purchase market remains weak."

“With fixed rates available below 5% for any period up to 15 years and trackers/discounts available from Base Rate –0.31% for 2 years, to Base Rate +0.14% for the mortgage term, borrowers are spoilt for choice, but getting advice from a good independent broker has never been more important.”