Interest Rates

31 July 2007


Managing Director, Worldwide Financial Planning Writes:

Much talk has taken place about the impact of interest rates and where/what effect this will have on the consumer, and it’s easy to rush into a mad panic – why not, the monetary policy committee (MPC) seems to be.

A study of the July minutes of the MPC made interesting reading. Point four had commented implied inflation forward rates were 10 basis points higher than the May inflation report and 60 basis points higher than two years previous, which was considerably more than the US or Europe. The note also commented there was a little confusion as to why this was caused.(1)

Point 15 indicated that retail sales had fallen back in June, which is comforting and proved that consumption might be softening. The Bank of England confirmed there was little change in the demand for unsecured lending (not good), but the supply of credit had actually tightened which was positive.(1)

Once again the key issue was that only a third of one percent of increase had actually made its way through to borrowers as many are on fixed rates. This effectively means that the MPC struggle to slow down spending and consumption as many are on lower fixed rates and interest rate hikes have no impact on their outgoings. There is no doubt it will begin to have an effect, as these borrowers will be mindful of the future that faces them when they come off that protection, only to be clobbered by a massive increase in payments.(1)
There was evidence that the housing market was again under pressure as there were fewer new buyer enquiries.(1)
Point three noted that CPI inflation had fallen to 2.5% in May as expected, and they also expected this to fall to below the 2% target over the next year. Interestingly that projection had been conditioned on the belief that a further 25 basis point rise in July was expected to 5.75% which of course happened.(1)
The MPC had commented there was an upside pressure on inflation caused by the impact of stronger demand growth on companies prices, the evolution of inflation expectations, prospects for energy and import prices, and a degree of spare capacity in the economy.(1)
More worryingly for future rates was the fact that Uk output growth continued to be strong and total personal credit continued to grow strongly and therefore the level of household debt was increasing.(1)
Point 29 commented that whilst most of the rises in mortgage rates had not passed through to households, when it did, demand would slow, possibly quite sharply…you’re not kidding.(1)
The members of the committee who were concerned about this also commented that the level of debt in households was something that needed a gradual rather than sharp approach, obviously to avoid a recession and in turn deflation/stagflation, which would be a disaster.(1)
On a few occasions the MPC commented that the August inflation report would prove very fruitful in determining the trends moving forward, so watch out for that.(1)
The committee voted 6:3 in favour of a 0.25% rise but there was no clear presumption that rates needed to rise further. Indeed the six who voted in favour of the rise commented that they wished to have it now so as to avoid the need for a future rise for more than what was needed.(1)
In some ways this contrasts slightly with other sentiment. Tony Nutt the highly successful Jupiter fund manager commented that he expected rates to go as high as 6.5%.(2)
This could prove tricky for the borrower with the £120,000 mortgage who fixed at 4.25% two years ago. They will be used to paying £425 per month only for their new rate of £775 per month, a colossal 82% increase. For someone earning £25,000 per year, this is effectively a disguised tax hike of 16.8%. To say this will slow down spending is a little bit of an understatement.
(1) Minutes of the Monetary Policy Committee meeting July 07
(2) Jupiter fund group


For a fact sheet on the best fixed rates or if you have a financial query, call 0845 230 9876 to speak to an Independent Financial Adviser or e-mail info@wwfp.net


Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.

20 June 2007

As we approach the next monetary policy committee (MPC) meeting there is no doubt that concerns will be raised as to the future of interest rates as I laid out in my article a couple of weeks back. I don’t believe they will raise rates now and it’s likely they will allow the current rate rises to have their impact on the spending patterns of the consumer, before making the decision to increase. Keep a close eye on the inflation data coming through over the next few months.

It dawned on me as I read the MPC notes there was potential for considerable alarm for many borrowers. The committee had commented in their notes that the interest rate rises had not really had their impact on spending yet and naturally that would be confusing. How do you take money out of the consumers pocket yet they carry on regardless.

It transpires that the rises in interest rates were not making their way through to the overall cost of borrowing. How could that be so? The average mortgage rate had only increased by about half the increases in the bank lending rate that had occurred since mid 2006. The reason for this was that over 50% of borrowers had a fixed rate mortgage. Whilst loan approvals, site visitors and unsecured lending (like credit cards) had continued to slow, other secured lending had continued to rise.

The concerns are high for those on fixed rates from two years ago. If they were fixing at say, 4.75%, a £120,000 mortgage would be costing them £475 per month. If their fixed rate finishes today, they will be coming out of that rate and onto a standard variable rate which is 7.39% so their new payment is a massive £739 per month. This is £264 more than they will have been paying - a whopping 56% increase in payments!

Worse news may be on the way. The concerns over spending were such that the financial markets have priced a further rise into the market before the end of the year taking payments up a further £25, or 61% more than they were paying in their fixed rate.

The impact could be considerable. Those who purchased on a buy to let mortgage at a fixed rate, expecting the rent to pay the loan, will now be wondering what to do. We have already started to see properties being sold as the rent does not cover the loan. Be careful if you are considering this as you may have capital gains tax to pay on disposal of the house.

It is very natural to expect that when these rises have their true effect (i.e. everyone comes out of fixed rates and has to pay more) that demand will slow. If demand slows and supply increases (i.e. people reducing their debt or risk by selling their 2nd properties) the inevitable will surely happen – falling house prices.

So what can you do? Well firstly consider where you think interest rates will go. If you think they will continue to rise you might take a fixed rate. If you thought they would fall, you might opt for a tracker or discounted rate.

The governor of the bank of England wrote to the chancellor of the exchequer to explain why inflation had risen over the maximum target of 3%. The comment was made that the committees’ central expectation was that inflation would fall to the target of 2% by the end of the year. If this is so, interest rates will prove benign and should then fall off, along with fixed rates.

If you are coming out of a fixed rate now, avoid fixing your new mortgage for too long, as rates should drop. This assumes you can afford that gamble. Personally I would wait to the end of the year before I fixed, to ensure the best deal. 


For advice on the best rates available call 0845 230 9876 or e-mail info@wwfp.net


Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.

All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.

5 June 2007

Reader Writes:

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 


Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.


Source (1) You can find the source at www.bankofengland.co.uk/publications/minutes/mpc/pdf/2007/mpc0705.pdf