Assetz® News - Rate rise relief

Rate rise relief

8th September 2006 |

Homeowners can rest assured now that their mortgage repayments will not shoot up as the Bank of England's monetary policy committee (MPC) chose not to raise interest rates yesterday lunchtime, keeping them at 4.75 per cent.

On August 3rd, the MPC voted to raise rates a quarter of a per cent for the first time in two years and it was feared that September would herald the same decision in a bid to stop encroaching inflation.

However, indicators from the economy's performance last month did not warrant such a move, although experts warn that we are likely to see a rise before the year is out.

Responding to the news, Barry Naisbitt, Abbey National's chief economist, said that he believed the MPC to be employing a 'wait and see' approach to the situation. He explained: "MPC members will probably want to evaluate the incoming economic news and assess whether the change made last month has had any impact on economic activity and inflation expectations."

The Council of Mortgage Lenders (CML) concurred using the example that consumer price inflation stood at 2.4 per cent for July and is expected to rise further before moderating to the bank's target of two per cent. Tinkering with interest rates has a delayed effect on the economy and so analysts must be patient before they jump to any scaremongering conclusions.

Indeed, as previously reported on Assetz news, the housing market performed well in August with a strong and steady one per cent rise in property prices meaning that prices have risen 8.2 per cent for the year.

However, it is expected that demand will dampen over the coming months as affordability pressures hit buyers' pockets, reigning in these price rises.

Jim Cunningham, senior economist at the CML, said that while "the economy looks set to grow at the trend rate or above for the next few quarters at least", he believes that the time for another interest rise is close.

"Financial markets expect the repo rate to raise to five per cent buy the end of this year compared with toward the end of next year before the August MPC meeting. The market's view of the risks is little changed from a month ago with options and futures market activity signalling a 20 to 25 per cent chance that the repo rate will be above 5.5 per cent in a year's time and a five per cent chance it will be above six per cent."

Vicky Redwood, an economist at Capital Economics, agrees, saying that recent data has shown 40 out of 56 forecasters are predicting a further quarter-point increase in interest rates at this November's MPC meeting.

Assetz's Stuart Law said that a rate rise this August could have damaged the market "irreparably" and that the MPC made the right decision.

"House price growth is positive but sustainable, and does not currently need curbing. Investors and first time buyers in particular are already feeling the pinch of the last rate rise and a further jump in rates would have had a disastrous effect on the market", he said.

Although the housing market breathed a sigh of relief yesterday, the indicators suggest that the MPC's rate will not lie under five per cent for much longer.