Interest Rates to remain low??

I saw an article at the weekend prepared by the Centre for Economics and Business Research (CEBR).

They believe the base rate will remain at its current 0.5% level until 2011 and not reach 2% until 2014.

The report predicted the pound will weaken further, falling to $1.40 and “possibly” below 1 euro.

Its forecast is based on the government managing to slash the UK budget deficit by £100bn over the next parliament.

It says that about £80bn of this would come from spending cuts, and a further £20bn from tax rises.

I must say I am surprised at this report. Many clients have been asking what they should do about their mortgage interest rates. The feedback we have had (from the experts) is that higher interest rates are on the horizon. Hence the advice on mortgages for many clients is that it is best to fix for up to 5 years to protect themselves from high interest rates accordingly.

I fundamentally do not believe that tax rises will follow in the short term. Many Companies and individuals are simply not making any money, therefore to tax them further is pointless. At the end of the day Governments tax income and gains and do not generate revenue by taxing losses.

I genuinely believe that the Government will continue to stimulate the economy and as profits rise, then eventually tax hikes will follow. Before this, however, as profits rise, this creates inflation (however small in the short term) which will be followed by higher interest rates to keep inflation under control.

Remember fixed rates may not suit all clients depending on your individual circumstances, but they do offer peace of mind of knowing what your payments will be from month to month. I cannot guarantee where interest rates will go or how far, but all the indications are that they will rise in the future. This explains why I feel fixed rate mortgages are worth considering for some clients in the current climate.

I believe the recovery will be slow but is underway, and there will be “blips” on the way. For this reason, I am predicting higher interest rates.

This article has done nothing to change my view.

Regards

Adam Rowbottom

Chartered Financial Planner