which way will loans go after the world cup
Funny old things interest rates. Whether they rise, fall or stay put they remain a topic of conversation up and down the country. Actually, when they do remain unchanged, as they have for the last 11 months, amateur speculation increases and myths arise.
I have heard theories that just about everything from John Prescott's sex life (bleugh) to the hosepipe ban (not a euphemism for Prescott's sex life) is set to influence the cost of our mortgages and the value of our savings account payouts.The seven men and women who currently set base rate - the Bank of England's Monetary Policy Committee (MPC) - are never likely to please all of the people all of the time. And they consider a wide range of economic factors and indicators when making their minds up. The minutes of their July meeting reveal that they left rates unchanged at 4.5% because a weaker jobs market would help ease pricing pressure. Look ahead and analysts' opinions divide. According to economic forecast group the Ernst & Young Item Club, the MPC has enough room to manoeuvre to allow interest rates to stay at 4.5%.
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It expects rising oil and commodity prices will slow growth, allowing the Bank enough slack in the economy to leave rates on hold. Then consumers and the government will also put the brakes on growth as they cut back after years of heavy spending. Despite pressure from rising oil prices, Ernst & Young said inflation was likely to fall below 2% in the middle of next year and hit an average of 1.8% in 2008. Should they stay or should they grow? 'With the economy showing signs of rebalancing away from the consumer and towards investment and trade, the economy is moving in exactly the direction the Bank would want,' says Steve Radley, chief economist at the Engineering Employers Federation (EEF). 'For the time being, there is no need to risk rocking the boat with a move in either direction.' The CBI director-general Richard Lambert is himself a former member of the MPC and is a former editor of the Financial Times. He has urged the Bank of England to leave interest rates on hold next month, adding 'It's possible that, if inflationary pressures rise, then a modest increase in rates might be necessary, but not until later in the year.' After a relatively brisk summer, retailers are now braced for a disappointing autumn, the CBI reports. Mr Lambert believes the so-called World Cup effect would be 'short-term and relatively temporary'', since much of it represented spending which would otherwise have taken place later in the year. Consumers are also under pressure from high household bills and rising fuel costs. Mr Lambert said he thought the boom enjoyed in economies around the world was drawing to a close: 'This year will mark some kind of peak in the global economic upswing, and 2007 is likely to be tougher,' he warned.But others expect rates to move soon - perhaps as early as next month - to keep inflation in check. It rose from 2.2% in May to 2.5% in June, overtaking the Bank's 2% target, due in part to soaring energy costs.
If it fails to drop or suffers any more fast increases, the heat will surely be around the corner for the MPC. James Knightley, economist at ING suspects the MPC will raise rates in November: 'We look for rates to peak at 4.75%, while the markets see the risk of them going to 5.25% next year,' he says. Finally, if in doubt, cover your bets. Trevor Williams, chief economist at Lloyds TSB Financial Markets says: 'The direction rates could take is becoming much less obvious. The chances are, rates will be held for a few more months, although if growth continues to out-pace the long run average, and inflation stays above target, we could see a rise come the autumn.' So rates could stay the same. Or, er, rise.Avoid base rate rises Of course the base rate - which forms the starting point for the rate of interest you are charged by your mortgage lender - is still, historically speaking, very low. Plenty of homeowners remember the painful days when rates hit 15% or more.So what can borrowers do to beat the base rate? For starters, if you are lazy enough to pay your lender's standard variable rate (or SVR) - which is usually the most expensive and has absolutely no frills - then you are throwing your cash away every month. But amazingly, one out of every two homeowners surveyed by Bradford & Bingley said they would not consider remortgaging unless interest rates increase by a full 1% or more. Almost two thirds said they would not be concerned about increases to their mortgage repayments until they had risen by more than £50 per month. And a very relaxed 35% of those asked said it would take an increase of more than £100 per month to spur them into action. Many mortgage lenders are on the case with new products designed to help you avoid paying more than you have to. Ray Boulger, senior technical manager at John Charcol, comments: 'In the current market there is considerable uncertainty as to where rates are headed over the next year, but current fixed rates are factoring in a half a per cent rise in Bank Base Rate which may well not happen. We have therefore specifically put together this mortgage as a superb solution for those who think fixed rates are expensive but like the idea of a fix when they feel the price is right. Put simply, it allows borrowers to take advantage of a low tracker rate whilst retaining the ability to move onto any fixed rate, until 31st January 2012, for any reason. A unique feature of this droplock option is that borrowers will not be charged a new arrangement fee if they exercise their right to switch.'
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