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Rate Rise Expectations Swing

07th April 2011

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Whilst the Bank of England’s’ Monetary Policy Committee, (MPC) has decided to keep Base Rate on hold at the historic low, the endless and sometimes tortuous debates around “to rise or not to rise” seem to be conducted in an ever-increasing cacophony of sound.

Among the many voices trying to shout out different things at once, recent reports that the UK economy has been “running out of steam” seem to have done enough in the short term at least, to convince the MPC to hold their nerve.

The National Institute of Economic and Social Research (NIESR), for example, suggested that the recovery is faltering despite the economy growing by an estimated 0.7% in the first quarter of this year.

Meanwhile, figures from the Office for National Statistics showed a 1.2% drop in British industrial output in February, while manufacturing output was flat month-on-month, disappointing City analysts who expected growth of around 0.6%.

Taken together with reports that consumer confidence remains weak and consumer spending tight, you can understand this latest decision.

However, as ever, this is only part of the story. The European Central Bank faces a monumental decision this afternoon as to whether they will raise rates, with the majority expecting they will, which if followed through will heap more pressure on the Bank of England to follow suit.

While some argue inflation is being used to happily munch away at our public debt, others suggest that this makes matters worse as it is hampering our recovery and that the Bank must be seen to act to tackle the problem.

Charles Goodhart of the London School of Economics stated that high inflation was “raising the deficit and cutting consumption by reducing real incomes.” He was backed by, amongst others, Sir John Gieve, a former Deputy Governor of the Bank of England who said that the recovery, whether smooth or not, was still under way and therefore “the Bank can now afford to show it still cares about inflation”.

Meanwhile the interest rates being paid on short term Fixed Rate Bonds have been steadily rising, signalling an expectation of a Bank Base rate rise in the next few months.

As far as the mortgage market is concerned, there has been some concern that the cost of funding is about to get more expensive again. In the meantime there has been a return of some semblance of competition to the market, with reports stating that there are now more than 10,000 mortgage products available once more.

Fixes at 2.79%, (4.20% APR) for 2 years, 3.59% (4.80% APR) for 3 years and 4.39% (4.30% APR) for 5 years are still available for the time being, whilst tracker products with no penalties are available at just 2.35%, (2.40% APR).

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UPDATE 13:08 on April 7th 2011

Interesting to see that the European Central Bank, (ECB) have indeed INCREASED their Base Rate by 0.25% to now stand at 1.25% for the first time in 3 years as they react to higher inflation.

With the very public issues in Portugal some believed that the expected rise would be delayed, but even though this is likely to hurt countries such as Portugal worse as borrowing costs rise, this shows the ECB’s determination to take action before inflation begins to filter through into wage rises.

As mentioned above, this is likely to add further pressure  on the Bank of England to also take action sooner rather than later.

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Andrew Montlake

About Monty

Andrew Montlake, Director and Spokesperson for Coreco, gives his honest and forthright views on the mortgage market, economy and all things property related. Monty was voted "Mortgage Personality of the year 2008", "Best Press Spokesperson" in 2011 and is the current holder of the British Mortgage Awards “Best Marketeer” title. Expect expert analysis, delivered in a down to earth style with a side helping of exuberance.