10 Feb 2011

Interest rates kept on hold

The Bank of England votes to keep interest rates at 0.5 per cent for the 23rd month in succession.

The Bank of England (Reuters)

Despite rising inflation, the Bank’s Monetary Policy Committee (MPC) decided against an increase in rates, which are at an historic low.

The Consumer Prices Index measure of inflation rose to 3.7 per cent in December, well above the Bank’s 2 per cent target – and further rises are expected this year.

But while Britain has come out of recession, there was an unexpected contraction in growth in the last three months of last year – and members of the MPC will have been wary of damaging demand in the economy by increasing borrowing costs for households and businesses.

MPC divisions

Despite these concerns, two of the nine members of the MPC, Andrew Sentance and Martin Weale, voted for a 0.25 per cent rise in January – and the City expects rates to increase this year.

ING’s James Knightley said. “Despite our worries about the economy, there is clearly growing pressure on the Bank of England to do something to combat near-term inflation fears, and as such we would not be surprised to see a May rate hike.”

Howard Archer, of IHS Global Insight, said: “Even if interest rates do rise in the near term, the likelihood is still that they will rise only gradually and remain very low compared to past norms.”

Employers predict a rise after March. Ian McCafferty, chief cconomic adviser at the Confederation of British Industry, said: “We expect the Bank to start preparing the ground for a gradual normalisation of monetary policy around the second quarter of the year.”

'Mortgage ticking timebomb'

It is a matter of when, not if, mortgages begin to rise. At 0.5 per cent, they are not going to fall any further.

With inflation expected to creep up this year, interest rate setters at the Bank of England are poised to take action - and that means a base rate rise and higher mortgage costs for millions of people.

Martin Lewis, founder of MoneySavingExpert.com
, is worried, pointing out that the low rates we are paying at the moment are an historical anomaly.

He told Channel 4 News: "I call this the mortgage ticking timebomb. When rates go up, there are going to be many people who cannot afford their mortgages, and I wish policy makers would realise this now.

"The biggest worry right now is that pre-credit crunch, most people's standard variable rate (SVR) and tracker mortgages were 1 per cent above base rate. They're now 3-4 per cent above base rate."

Mr Lewis said if base rate rose to its traditional level of 5 per cent, people on tracker and SVR mortgages could end up paying rates of 9 per cent, which many would struggle with.


'Start saving
'

So what can people do to prepare for a rise? Start saving now is Mr Lewis' advice.

"People should consider getting a better deal all the time. It may not make sense to be paying off your mortgage at a low rate, but you need to put money aside."

The options include switching to a fixed rate deal now, so you know exactly what you will be paying in the months and years ahead as rates rise - and are able to budget accordingly.

Ben Yearsley, from Hargreaves Lansdown investment brokers, agrees that fixed rate deals should be considered, and expects these deals to become more expensive in future.

"If you can get a good rate now, you might want to consider fixing it. When rates start rising, fixed rate deals will get worse."

Mr Yearsley thinks a base rate to 5 per cent is some way off. "I can't see a situation where rates go from 0.5 per cent to 5 per cent in the next six months.

Of course a rise in base rate is not bad for everyone. Savers benefit. The Bank's low interest rate policy has damaged many people's investments.

Rates are low. The best easy access account at the moment is the Post Office's online saver, which pays 2.9 per cent.

Mr Yearsley thinks the prospect of a rise in base rate should dissuade savers from choosing long-term deals at the moment.
Economy graphic

Manufacturing

Following the 0.5 per cent fall in gross domestic product in the final quarter of 2010, Ministers will be concerned by official figures released today which show an unexpected drop in manufacturing output in December.

Factory output, which has seen strong growth in recent months and has helped pull Britain out of recession, dropped by 0.1 per cent, following a 0.6 per cent rise in November. Analysts had forecast a rise of 0.4 percent.

The Office for National Statistics blamed the fall on a drop in the production of materials used in the construction industry, including bricks, cement and plaster, which fell at their fastest rate since 1979.

But total industrial production rose by 0.5 per cent in December because of the cold weather: gas and electricity usage increased by 6.1 per cent.

Mortgage repossessions

Although the statistics on factory output are a worry for the Government, the Coalition will be buoyed by the latest figures on mortgage respossessions.

These fell to a three-year low in 2010, according to the Council of Mortgage Lenders (CML). Around 36,300 homes were repossessed, 24 per cent fewer than in 2009.

The number of repossessions has fallen steadily since peaking in 2009, but the CML expects a rise this year as interest rates rise and the Government cuts spending and raises taxes.

The CML is predicting 40,000 repossessions in 2011. Director General Michael Coogan said: “As the numbers clearly demonstrate, repossession is a last resort. Most people’s payment difficulties can be managed and controlled for a period until their circumstances improve.

“As we go through 2011, the number of people facing payment pressures may increase if interest rates rise, and as a result of the spending cuts that have resulted in reductions in the level of public support available.”

Earlier this month, it was revealed that mortgage approvals fell to a record low in 2010.