Reason for optimism despite inflation rise

25 January 2010

Last week’s inflation figures came as a bit of a shock. The jump in December was the biggest rise on record but what does it mean for the mortgage market?

My view is that it is too early to tell. If the governor of the Bank of England Mervyn King is right and this is only a temporary blip then it will have no noticeable impact. But if it is the start of a trend the outlook could be different.

If it is the start of higher inflation then clearly the Bank will come under pressure to stop its quantitative easing programme. It will also have to consider increasing the base rate which will have a negative effect on the mortgage market and the wider economy.

The political pressure to keep rates low will no doubt stop any imminent base rate rises but LIBOR and swap rates may start to rise, thus increasing the cost of borrowing for everyone.

That said, LIBOR and swaps hardly moved after the announcement so it looks like the markets took things in their stride.

On the positive side I was equally as surprised by the fall in unemployment. I thought the figures would continue to rise for at least another six months, if not longer.

If we get confirmation that the country came out of recession in Q4 2009 we will certainly have reason to be optimistic about 2010. And with the apparent rush of new lenders to the market perhaps mortgage intermediaries will have something to cheer about as well.

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