Interest rates rises inevitable despite no change for last 20 months

News - Banking

Written by Ray Clancy

Friday, 05 November 2010 11:52

Borrowers should consider fixing interest rates now despite them being held at a record low levels as they will rise and may catch investors unawares, it is claimed.

With the Bank of England leaving the interest rate unchanged for the 20th month in a row and leaving its quantitative easing programme at £200 billion, experts are warning that the status quo cannot continue for much longer.

The resumption of quantitative easing in the US shows that its economy is too weak to facilitate economic growth outside of America and measures such as the VAT rise in January will impact on UK growth, they believe.

‘Fourth quarter UK GDP should benefit from consumers buying big ticket items before the VAT rise in January next year but that will detract from the first quarter GDP for 2011. How the economy performs in 2011 as the impact of the Comprehensive Spending Review progressively bites will be a major factor in determining whether the next move on monetary policy is more easing by increasing the scale of quantitative easing, or tightening by increasing the bank rate,’ said Ray Boulger of leading independent mortgage adviser John Charcol.

According to Barry Naisbitt, chief economist at Santander UK, financial markets will be looking to the minutes of the meeting and, more particularly, the Inflation Report to get a better sense of how the MPC is now thinking.

‘For the past few months one MPC member has been voting to raise rates and last month another member voted for more quantitative easing. With inflation still well above its target and the increase in GDP in the third quarter ahead of market expectations, it will be interesting to see if the voting pattern changed,’ he explained.

‘As usual, the key to this month’s decision will have been how the MPC judged the prospects for inflation and the economy generally. The US Federal Reserve has just announced more quantitative easing, reflecting the lack lustre recovery and continued very high unemployment. The future for the UK economy remains uncertain and there are concerns about a weakening of growth ahead, so the MPC still has its foot hard down on the accelerator pedal. The Inflation Report is likely to give us a better indication of whether it is likely to ease back a little or if it is more likely that it will press down even harder,’ he added.

Jeremy Cook, chief economist at World First said there will have been an interesting debate over adding more stimulus. He believes there will be more quantitative easing sooner rather than later. ‘We are out of the woods yet however and I anticipate a £50 billion injection post-Christmas,’ he said.

According to Ian Long, director of St Trinity Asset Management, interest rates cannot drag along the bottom indefinitely. ‘Inflation remains well above the 2% target and the economy is growing at a quicker rate than many anticipated. And when they do hike rates, thousands of homeowners will need to re-jig their finances to avoid being caught out,’ he said.

‘One in three new borrowers is on tracker rates and will see monthly mortgage payments head north as interest rates go up. But the real area of concern is homeowners who have become accustomed to cheaper tracker and variable rates and have used the extra disposable cash each moth to boost their monthly financial commitments,’ he explained.

‘Many are looking to fix rates now, if they can afford it, before interest rates rise. But those who can’t, or don’t wish to, remortgage will need to be prepared for higher mortgage payments or we might see swathes of households defaulting on mortgages over the next year,’ he added.

Eric Stoclet, managing director of servicer Crown Mortgage Management, believes rates need to stay low. ‘Although the housing market has held up remarkably well through 2010, it faces some serious challenges in the medium term. There’s rising public sector unemployment, falling consumer confidence, and rising VAT. Throughout 2011 and 2012 we will need to keep all monetary options on the table,’ he added.