Lenders split on further rate rises

Lenders are split on whether further rate rises are likely in order to bring inflation back under control.

This follows the Bank of England’s decision to freeze interest rates at 5.25% in March.

Stephen Leonard, director of mortgages at Alliance & Leicester, says: “Over recent past weeks there has been growing consensus in the market that the base rate would not rise beyond its current level in March, and today’s announcement to maintain it at 5.25% reinforces this sentiment.

“And while this most recent Monetary Policy Committee decision will come as a relief to borrowers, we are not out of the woods yet and we shouldn’t be surprised to see at least one further rate rise during the course of 2007.

“The economy is currently growing in line with market forecasts whilst inflation and pay settlements remain the crucial factors to watch.

“Last month’s MPC minutes suggest that further rate rises are very likely if inflation fails to moderate.”

Matthew Wyles, group development director at The Mortgage Works, says: It is encouraging that the MPC made no change to the base rate this month. The case for further rate increases is getting progressively weaker.

Despite some recent modest strengthening, Sterling remains badly overvalued – particularly against the US dollar and yen and it will continue to be a target currency for carry traders.

The housing market, outside the overheated London market, is starting to feel the pinch from the January base rate rise and the current turmoil in the global equity markets can only serve to undermine confidence.

The January rate move was obviously intended as a stitch in time and a further rise now would not make sense until the MPC has given the last hike sufficient time to impact on the economic data.

But Colin Bell, operations director at commercial mortgage lender InterBay, says: “Although most pundits expected the base rate not to change this month, there are plenty of indicators pointing to the need for another rise in the near future.

“The forthcoming Budget may well have been part of the reason for holding off making any change right now, as well as the current global market volatility.

From a commercial perspective, retail sales are continuing to increase and commercial property owners are benefiting from the growth.

“Office space still continues to be heavily occupied and the commercial sector in general is buoyant and could absorb a further rise, albeit an unpopular change.