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Why are base rates having no impact upon mortgage rates?

As the UK mortgage industry breathes another sigh of relief that UK base rates remain fixed at 0.5% after this week's MPC meeting, there is confusion as to why mortgage rates have not fallen further in recent weeks. The truth is that base rates, while having historically played a prominent role in the mortgage arena, are now playing a lesser role due to the state of the worldwide money markets. We are simply down to a situation of supply and demand in the money markets, with very little liquidity and growing demand pushing interest rates higher and higher.

As a consequence, mortgage rates in the UK and around the world have been a little more volatile than you would have expected with base rates remaining at 0.5% for the 17th month in a row. At some point we will see a return to "more traditional" money markets and economic activity, but until then we may well see fluctuations in the money markets even if base rates remain unchanged.

This is a very difficult scenario for consumers to understand because it does not make sense on the surface. However, we are very much down to basics with regards to the money markets and liquidity, i.e. supply and demand, and if there is an imbalance in this situation then we will see "unexpected" movements in interest rates.

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