With consumer price inflation well above its 2% target and official figures released last week showing inflation is at 3%, Bank of England governor Mervyn King is required to write an explanatory letter to the chancellor.
With the service sector booming in Q4 2006 and activity during December at its strongest in nearly a decade (according to the Purchasing Managers’ Survey) the MPC was probably concerned that the pace of growth in the economy could put further pressure on wage inflation, another of its concerns.
A sharp fall in oil prices with a consequent reduction in petrol price inflation means Consumer Price Index inflation could moderate but with pre-announced increases in utility prices and university tuition fees yet to be phased in to the CPI index, inflation has yet to peak. Also, economists believe money supply is growing at its fastest rate in 16 years.
The combination of this rapid growth in money supply and domestic pricing pressures means there is a possibility that rates could rise further.
But most commentators forecasting further rises also feel that inflation will peak in the second half of this year which could result in a downward trend in interest rates.
They cite the weaker than expected Euro-zone economy together with a slowdown in US growth as factors impacting the UK economy this year. This might mean the MPC has to stimulate domestic activity by cutting interest rates.
Remortgaging activity traditionally in-creases after an interest rate rise and brokers are in an ideal position to help thousands of people wanting better deals. This is especially true for clients who are not locked into deals with early repayment charges and are able to look for new mortgages straight away.
The general principle for anyone looking at a new deal is that a low rate/high fee deal works best for people with larger mortgages while those with smaller mortgages should opt for deals with few or no upfront costs.
A number of trackers are available below the base rate and these will be attractive to borrowers who are comfortable with following interest rate changes over the next couple of years.
There is much uncertainty over how much further interest rates must rise to contain inflation. In such an environment, the expertise of brokers will be even more valuable and could result in a boost to remortgaging.