John Parker is deputy chairman of the BSA and chief executive of Stroud & Swindon The November 6 interest rate rise was not the best-kept secret in the City of London. Those in the know had been expecting it since the minutes of the Monetary Policy Committee's previous meeting were published on October 22 and the financial markets had been factoring in an interest rate rise for longer. It was extensively trailed by the media the weekend before so when the MPC announced its decision it seemed no more than a rubber stamp.
Borrowers on variable rates are naturally anxious to know whether this symbolic rise – the first since February 2000 – will be followed by more hikes as has been predicted in many quarters. Indeed, the market's yield curve – the interest rate on a string of long-term investments each having a different maturity – would suggest that the trend of short-term interest rates will be steadily upward. This would give an implied base rate of over 5% within 18 months – an increase of more than 1% including this month's rise.
I think the market has over-egged the pudding in response to fears of excess borrowing. The UK's economic position looks good with steady growth and inflation under control. Consumer spending remains strong although October data suggested high street sales are slowing while the housing market seems to be cooling of its own accord in a controlled way. With the economy on a fairly even keel I don't see the MPC wanting to risk the continuing recovery from the nervous environment of earlier this year as the Iraq war and an apparently faltering housing market combined to erode consumer confidence.
Interest rates will undoubtedly go up as evidence of increasing economic growth emerges but not to the extent predicted by the market. A Bank of England base rate of 5% by December 2004 looks too high based on the current outlook.
So, up – but by how much? It is fair to suggest that the home buyer should work on the assumption that if they choose a variable rate mortgage, their cost of borrowing will rise over the next two years. On the other hand rates should remain at lower levels than those seen during the 1990s. Some 20 years as an economist has taught me not to put my neck on the line with more specific forecasts!
However, if I was advising a member of my family on what type of mortgage to choose among the range of competitive products available on the market, I'd suggest one of the appealing five-year fixed deals that are still around at yesterday's prices, some of them at less than the market rate for five year money.
Alternatively, the first-time buyer may like some of the discounts off current standard variable rates which, even if the Bank of England raises rates a couple of times next year, would still look attractive.
Martin Ellis is chief economist at the Halifax
The decision this month by the Bank of England's Monetary Policy Committee to raise interest rates came as no surprise. The reasons behind the increase have been widely debated in the press. While we cannot be certain of its rationale for imposing the 0.25% increase without seeing the meeting's minutes, we can examine some of the factors considered by the MPC in coming to its decision.
The minutes of the October MPC meeting revealed its growing concern about the economy. Bank of England figures, for example, show that households borrowed a record £10.7bn in September – 14% higher than a year ago.
An increase in bank base rates will have a minimal impact on the housing market. The hike is the first increase in borrowing for nearly four years and will add about £4 per week to a typical £80,000 mortgage – a figure the vast majority of homeowners can easily absorb.
Although personal debt levels are high, the impact of historically low interest rates means that borrowing is still affordable. The average borrower is currently spending 13.6% of their average gross earnings on mortgage interest payments, well below the long-run average of 21%. Figures from the Council of Mortgage Lenders show the average LTV is currently 66% – down slightly from 67% in 2002 but well down from the figure recorded in 1993 (78%) – and that over half of all new borrowers are now electing to take a fixed rate mortgage.
The foundations supporting the UK housing market are strong. Interest rates are low and, notwithstanding the predicted increase in Bank of England rates over the next year to 18 months, there is no reason to fear a dramatic upswing in the foreseeable future. Unemployment remains low and affordability remains at some of the most favourable levels seen in the past 20 years. Again, there is no real evidence to precipitate a forecast that either of these factors will change dramatically.
Extensive research conducted by Halifax confirms the view that the main long-term proponent of house price movement, be it negative or positive, is the level of employment. Employment levels remain good and are up by 233,000 on a year ago following a 101,000 increase in the last quarter. These high employment levels continue to underpin the housing market.
In terms of what will happen to interest rates over the course of the next year we can expect to see an upward movement in base rates to end 2004 at or around the 4.5% mark as the UK economy continues to be healthy with growth rates that are around or slightly above long-term trend. This will ease the path for the MPC to amend interest rates to control any potential build-up in inflationary pressures associated with higher economic activity.