Rate Rise Expectations Swing

publication date: Apr 19, 2011
author/source: Guest article by Coreco Group

Rate Rise Expectations Swing

Bank Base Rate Predictions

Whilst the Bank of England’s’ Monetary Policy Committee, (MPC) has decided to keep the 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.

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. It was interesting, and perhaps telling, to see that the European Central Bank, (ECB) the same day increased their Base Rate for the first time in three years by 0.25% to now stand at 1.25% as they react to higher inflation.

This shows the ECB’s determination to take action before inflation begins to filter through into wage rises and will no doubt add further pressure on the Bank of England to also take action sooner rather than later.

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).

Guest Article by Coreco Group
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