05.11.09 by Rob Gill
Base Rate Outlook Uncertain
The length of the recession is creating increasing uncertainty over the future direction of UK base rate and mortgage rates.
Following the near collapse of the global banking system in 2008, authorities around the world slashed rates to unprecedented lows, pledged billions of pounds, dollars, euros and yen to shoring up their banks and economies and started “printing money” in the form of Quantative Easing programmes.
Now this Armageddon scenario has been avoided and other major economies have climbed out of recession, interest rates around the world are starting to rise, with Australia setting the pace having raised their base rate twice in recent months. Non-Euro European countries, such as Norway, are tipped to follow before too long with the Eurozone and US not far behind.
In contrast, the UK remains mired in recession and we should, in theory, be in no hurry to raise rates. Furthermore, our huge and rising public debt will leave the next government no choice but to cut spending and raise taxes. Removing this stimulus to the economy will place an extra burden on low interest rates to drive growth.
There are however two important caveats to the UK maintaining interest rates of 0.5%. Firstly, as other countries start to raise rates, investment will move towards their higher yielding currencies putting further pressure on an already weak pound. Although UK authorities have so far looked benignly on the devaluation of the pound against other major currencies in the last 2 years, they will not want this to carry on indefinitely and spiral into a full blown currency crisis. An over weak pound could lead to rampant inflation, decreased investment and damage the government’s ability to borrow cheaply. To avoid this, the Bank of England may have to raise rates without too much lag against other major economies.
Secondly, the Q3 GDP figure has been met with a fair amount of scepticism by commentators and economists. No doubt this is to some degree and attempt to deflect attention from the blanket assessment amongst these forecasters that GDP would show flat to small growth instead of a significant decline. Compiling accounts for the entire economy is however a mammoth task, as such initial GDP estimates are often revised and at this stage in the cycle they tend to be upwards (Q2 figures were revised from - 0.8% to -0.6%). Thus revisions to the Q3 figure and better figures for Q4 could result in a more robust picture early next year than currently expected.
Despite all this confusion, the picture for UK base rate remains as it has been since March- will have to go up at some stage, the only questions are when and how quickly. Bearing in mind that the Bank of England may be forced to follow other central banks to protect the pound, and that the Q3 GDP figures may not have shown the full picture, a first rise in UK Base Rate could come by mid 2010.
Longer term, there is concern that the record low interest rates and Q.E. will eventually hit the economy with a substantial lag effect, creating an inflationary spiral which will lead to interest rates rising quickly from 2011 and beyond.
Monty’s Mortgage Blog
29.07.10
House Prices & Lending To Individuals
The frustration felt by many individuals that banks still do not seem to be lending in sufficient quantities is still evident in the latest Lending To Individuals figures from the Bank of England, which explains the frustration felt by many would-be borrowers.
Coreco
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