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Why the BoE had to raise interest rates

Last week’s decision by the Bank of England to add another 25 basis points to the base rate caught most of the market on the hop and caused even more misery for overtaxed home owners across the UK, coming at a time when statistically fewer people can afford it.

But the BoE is only doing its job. Last year the economy grew more strongly than expected. Unemployment is still rising while the number of people in work is at an all-time high. The value of private housing stock has grown by a staggering 12% over the past 12 months while house prices rose nearly 10% over the same period, and towards the end of 2006 were rising at their fastest rate for two years.

The widely anticipated high street bloodbath over the Christmas period never transpired, with many stores doing bumper trade over the festive season.

The last recorded figure for inflation puts the number just 0.3% below 3%. If it hits that figure the governor of the BoE is obliged to write a letter of explanation to chancellor Gordon Brown. The fact that interest rates have risen ahead of expectations has prompted many to believe that inflation might already have crept over 3%, spurring the BoE to act sooner rather than wait until the next inflationary report on Tuesday this week.

As we report in this week’s issue of Mortgage Strategy Michael Coogan, director-general of the Council of Mortgage Lenders, says inflationary pressure appears to be more pronounced, not least because of the prospect of higher wage growth.

So it would appear that the BoE is taking early steps to put inflation back on track by mid2007 and that by Christmas interest rates could be falling again. A little pain now instead of a lot more later in the year if inflation gets out of hand makes sense.

Revisiting clients who are on tracker mortgage deals would certainly help to alleviate their January blues.


Labour perpetuates cycle of despair

A key plank in the government’s housing policy has been its encouragement of the development of mixed communities whereby people from all levels of society live side by side. But in practice this may be backfiring in many areas and merely helping to perpetuate the cycle of deprivation the policy seeks to address.

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