Fixed rate ISAs and BOE future rates

ericpode

I need to switch an old Barclays cash ISA, and these two on the list seem to be worth a look. They give a bit extra for a 1 year FIXED rate, and I can afford to leave the money alone for 1 year.

• Principality BS Direct Fixed rate ISA (issue 36) - 6.35% (fixed until 05.04.2009) :starmod:NEW :starmod:
  Minimum deposit: £3,600.
• Britannia BS Fixed Rate Anniversary ISA - 6.30% (fixed until 30.09.2009) :starmod:NEW :starmod:
  Minimum deposit: £3,600.

But I guess it depends on what the likely BOE interest rates are going to be over the next 12 months.

Is there any indication of whether the BOE rates are likely to go up or down over that period?

Milarky

ericpode wrote: »

But I guess it depends on what the likely BOE interest rates are going to be over the next 12 months.

Is there any indication of whether the BOE rates are likely to go up or down over that period?

Who knows? They may want to reduce rates in the meantime but haven't been able to do so because inflation has taken off....

If things get worse and worse then they are more likely to abandon the 'tracking' of an inflation target aren't they? Things are already well off the course.. the policy is only just credible now.

If things don't get any worse then they can probably justify no action on interest rates for some time.

If things improve more quickly than expected (unlikely..) then they could cut rates - but even then they would cut them gingerly and space the cuts out over a year?

Milarky

Actually now I come to think about it, no one seems to ask why the country can't manage on rates as low as 5% in the long run? I think the argument used to be over the international character of borrowing (i.e. global liquidity) but in the last 12 months that has dried up. Therefore, we ought to be thinking more in ('1980s') terms of domestic borrowing financed by domestic saving. That means higher rates in the 'marketplace' as we have seen. It should also mean that the BOE rate either becomes irrelevant as a benchmark (as people 'clock' what has happened and close their 'tracker' savings accounts) OR the BOE rate more honestly reflects the cost of borrowing money domestically.

In other words, if they put rates up/down now only a segment of the savings market is affected. Similarly only a (now diminishing?) segment of the borrowing/mortgage market would repsond also.

Maybe trends in the mortgage market could give a clue as to the future trend in the BOE rate?

CLAPTON

well obviously if B Soc etc offer new fixed rates higher than their variable rates then they at least think that rates are due to rise... if they offer rates less than their current variable rates then they think rate will fall...
whether they are right or not is another matter.

runciblespoon

Not necessarily. Commercial lending has slowed down. A bank may have a parcel of mortgage debt coming up for refinancing, and finding it difficult to finance at agreeable rates on the commercial market. So instead they offer a fixed term deposit to attract new money, which might work out cheaper than the current commercial rate. They could offer a variable rate, but they don't have much security - if someone else has an enticing offer people will switch to that, and then the first bank will need to replace the funds somehow.

You might be right, though, in that building societies have limited access to commercial funding so perhaps this situation doesn't happen so much.