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‘Significant chance’ of negative interest rates in the UK

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The swaps market is pricing in a 15% chance of UK interest rates turning negative over the course of the next year, according to Hargreaves Lansdown.

Swap rates heavily influence the pricing of fixed rate mortgages offered by lenders such as banks and building societies.

Negative interest rates would be good news for borrowers as the cost of both fixed rate mortgages and Bank Base Rate trackers would fall, but bad news for long-suffering savers.

The swaps market is also giving a 50% chance of an interest rate cut in July, a 65% chance of a cut by August, and an 80% chance of a cut by the end of the year.

Meanwhile, the 10-year gilt yield fell below 1% for the first time this morning, to 0.933%, before recovering slightly, as investors sought the safety of government bonds in the face of Brexit uncertainty.

Laith Khalaf, senior analyst at Hargreaves Lansdown: “The Brexit vote has substantially moved the dial on interest rate expectations, with markets now pricing in a significant chance of rates going negative in the UK.

“This is good news for borrowers, who can now expect lower mortgage rates for even longer, but cash savers will be wondering just how many years they have to wait to get a decent return on their deposits.

“The Bank of England may soon find itself between a rock and a hard place, if the economy and inflation start pointing in different policy directions. That’s because although the Brexit vote has increased economic uncertainty, it has also taken a toll on Sterling, which is likely to feed through into inflation because it makes imports that much more expensive.  This raises the uncomfortable prospect for the central bank of cutting interest rates while inflation is rising, something it has proved it is willing to do in the past in order to boost the economy.”

Yields on the 10-year gilt falling below 1% morning represents a vote of low confidence in the UK economy, “though it does at least signal the bond market still expects the UK government to pay its debts, despite threats of credit downgrades from the ratings agencies”, Khalaf said.

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