Inflation increase will not trigger higher interest rates say brokers
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RAY BOULGER, INTEREST RATE RISE UNLIKELY
Fears that borrowers are facing a mortgage time bomb following the spike in inflation are unfounded, say brokers.
Figures from the Office for Nat-ional Statistics revealed last week that the annual rate of inflation, as measured by the Consumer Prices Index, rose from 1.9% in November to 2.9% in December.
The 1% rise is the largest mon-thly increase ever recorded by the ONS.
The surprise news has triggered fears that the Bank of England will look to curb inflation by rising interest rates, which would then push up mortgage payments.
But Ray Boulger, senior technical manager at John Charcol, says this isn’t likely to happen.
Boulger argues that as households are likely to strug-gle with costs, in-terest rates need to stay low.
He says: “The one thing that would kill the property market would be interest rates going up too fast. And if that was to happen it would put the banks under more pressure, because it would actually devalue their balance sheets.
“The last thing that the gov-ernment or the Bank of England wants is for that to happen because if we were to get another banking crisis, questions will be raised as to whether the government can afford to bail them out a second time.”
Andrew Montlake, director of Coreco Group, says that the rise in inflation may get some borrowers to consider fixed rate deals.
He says: “We have already seen more people considering a fix and we tend to point out that with trackers not just can you afford payments with a 1% rise, but can you afford a 2% or 3% rise?
“Remember many think this rise will be temporary so trackers will still be popular.”
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Readers' comments (1)
Salil chaudhari | 27 Jan 2010 8:15 pm
I think QE is filtering through to higher inflation albeit slowly.The BOE was right to increase QE in smaller chunks.We will get a much clearer picture about the behaviour of the UK economy by Q3 of this year.If the Govt puts the brakes on too early then we risk a double dip recession. If they delay putting on the brakes then inflation may get out of control and it may take a year or so thereafter to bring it back to the 2% target rate.I dont see interest rates rising until inflation is around 5% due to spare capacity in the economy.Raising rates now will kill of any chance of recovery.So I think the BBR will remain at 0.5% at least until Q4 2010.I think competetion for mortgages will get intense as more lenders come into the market with lower rates in competetion with inefficient lenders who are having to raise their SVR's to maintain profit margins as a result of losing business to Govt backed banks.
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