After the recent interest rate rise, do you have any views on where you believe interest rates will move from here onwards?
The interest rate decision was no surprise but I had thought they might wait a little longer to see if the inflationary numbers that were coming through were accurate.
Having read through the minutes of the monetary policy committee (MPC) meeting it’s clear there is another potential rate rise on the way – time will tell.
Rates are currently 57% higher than they were at their low point of July 2003. (1)
The key points of the minutes related to the fact they commented, not on a target inflation figure of a 1% variance from 2%, but of an actual 2% target, which may lend itself to a more aggressive approach to the policy. (1)
The MPC focus on inflation, and naturally spending, plays a big part in that. Oil had fallen on the month but the 15-day average price for oil was still some 17% higher than the same point for February, but basic foodstuffs had decelerated in previous months, which is good for inflation, and in turn rates. (1)
Whilst interest rate rises are meant to take money out of the consumer’s pocket and slow spending, the worrying concern is that 50% of those with mortgages are on fixed rates meaning that rate rises will not be having the desired effect. (1)
There must be a concern for the housing market, and in turn the borrowers who will be coming out of these fixed rates and into a much higher level of cost of borrowing. The other concern is that they may continue to spend, which may falsely support inflation at unnecessary levels and drive rates up further.
Consider also what happens when there is a surge in the amount of people who cannot afford their payments?
A glimmer of hope in the minutes pointed out the huge increase in household costs in February had probably driven inflation higher unrealistically. They noted furniture particularly and that it was probably more to do with a hike in preparation for the future drop for sales at Easter and may prove benign. It was also believed that the sharp rises in gas etc would soon fall out of the figures and inflation would soon be under control again – good sign for lower rates. (1)
It was comforting to see they also sighted the consumer’s debt burden as a risk especially with, as they put it, ‘the shorter term rise in rates’ – another sign that the current rate rises are temporary.
The committee questioned whether the rise for May should have been 0.50% or 0.25%! 0.25% was agreed and it was a unanimous vote in favour of a rise – worryingly pointing to another rate rise. Indeed the notes refer to ‘a high probability of another rise later in the year’(1)
So when might that rise be likely? The MPC commented that if they thought there was a need for an interest rate rise soon they would have made a strong request now for a 0.50% rise as opposed to 0.25% so don’t expect the next rate rise soon. Most members of the committee had been happy to wait for further information to come in regarding inflationary pressures such as household furniture costs etc and to see what impact the past rate rises had been on inflation. (1)
There was debate amongst the MPC who believed that excessive movements in the interest rate could impact growth on the economy but if it continued aggressively, to expect further rate rises.
In conclusion you should keep a close eye on any inflationary numbers coming through. If you are a saver you will be enjoying the extra income but if you are a borrower, consider you may have up to 0.50% extra to pay before the year end but its more likely to be 0.25% in a few months unless inflations calms.
If you would like advice or a free fact sheet on how to reduce your cost of borrowing or if you have a financial query, call 0845 2309876 or e-mail pmcgahan@wwfp.net
Source
(1) You can find the source at www.bankofengland.co.uk/publications/minutes/mpc/pdf/2007/mpc0705.pdf
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