Interest Rate Update

This time last year there were real fears of big interest rate rises during 2010, but what happened?

The key factor has been a change of Government for the UK. Labour intended to have us recover from this buy “booming” its way out of the mess. The Tory led coalition has chosen a more prudent method of cost cutting to help reduce the budget deficit which works in 75% of cases versus only a 25% success rate for Labour’s policy.

What this has meant is that (to date at least) the UK has not been downgraded by credit agencies, keeping it attractive to foreign investment and taking pressure of interest rates as a result.

So where for Interest Rates now?

A cooling global economy and an impending austerity squeeze in Britain will make the Bank of England (BoE) wait well into next year before hiking interest rates, a poll of 60 economists suggests.  They expect the BoE to hike its base rate by the end of the second quarter of 2011, starting with a 0.25% rise from its present record low of 0.5%, according to the  Reuters poll.  For the first time this year, no economist thought the Bank would raise rates before the end of 2010, something considered a foregone conclusion in polls conducted this time last year.

Increased austerity measures and a growing chance European economies will follow the U.S. economy in slowing down are overriding concerns about above-target inflation, the poll suggests.  The full extent of the government’s budget cuts will be detailed by each ministry in October.  Britain’s economy expanded 1.2% in Q2, its fastest pace for nine years, but analysts expect this to shrink to 0.3-0.5% in each quarter through to the end of next year.  Retail sales and consumer confidence figures over the last month have been buoyant, but business surveys of the private sector support expectations for a slowdown.  Inflation slowed in July to 3.1%, stubbornly above the Bank’s 2% target and one reason why Monetary Policy Committee member Andrew Sentance has voted for a hike at the last three rate-setting meetings.

So what does this mean to you and I?

Well, for borrowers it means mortgage interest rates are likely to remain at their current level until at least the end of the year. Quarter 2 next year indicates, around Spring time for the potential of rate rises. However, I now doubt interest rates will rise sharply as this will inhibit the ongoing recovery. Mortgage Lenders are already raking in huge profits on mortgages currently due to their wide margins when compared to base rate. This has been shown by the huge profits for the banks following the huge losses in recent times, post credit crunch. They will no doubt pass on any rate rises and their products will change before the actual rise occurs.

Therefore if you are considering a remortgage as a result of possible rate rises then January/ February, is probably the time to give us a call.

For savers we are looking at continued poor interest rate returns  on deposits for a good period yet. Many such clients are now looking to Dividend Income on shares to boost their incomes. Whilst share values may remain relatively static in the short term Companies issuing shares are expected to increase Dividends as they look to attract new monies for investment to allow them to expand and grow. This is potentially good news for investors who are willing to take some risk.

So whether it is mortgage advice or investment advice now is as good a time to review matters. So give John or I a call and we will get an appointment in the diary.