Inflation Up ton 3.3% But Base Rate Stays at 0.5%

by Mark Johnston

Financial experts and mortgage holders a-like have been keeping a watchful eye on interest rates. Borrowers are keen to see if the Bank of England increase rates amidst reports of an increase in inflation.

UK borrowers are especially interested in any potential base rate increases as this may have a direct effect on their monthly outgoings. This is especially true if they have a mortgage deal that is open to fluctuations such as a tracker or variable rate loan.

Mortgage holders waited with baited breath as the Monetary Policy Committee (MPC) pondered whether a rate increase would be needed. Luckily for many, the rate setters decided to leave the 0.5% rate unchanged but fears are growing of an increase in the new year.

Published minutes of the Monetary Policy Committee (MPC) meeting suggested that there were split views. Some were in favour of an increase after inflation reports showed an increase last month to 3.3%, which is well above the 2% target set by the central bank.

Although there were concerned about the risk of inflation the MPC were comfortable that the economy would start to pull the rate back down over the medium term. One of the committee’s members, Andrew Sentence, did call for a 0.25% increase to bring the rate back up to 0.75% to try and reduce inflation.

Many homeowners will be happy that the base rate has been kept at 0.5%.  They continue to pay back a lot less per month due to the historically low rate. That said, some borrowers who have fixed their mortgages recent might prefer a rise in rates to make it more worthwhile. The not mortgage holders but those who reply on their savings as a source of income like the over 60’s.

Those with savings need to adopt to the new post financial crisis environment and find different ways to make their money work harder. Ian Lowes from Lowes Financial Management said: “Income is the want of many clients yet income paying investments in a low interest rate environment are at a premium.  Whilst the likes of equity income and fixed interest funds are likely to be the default option for many, there may be a better way – income from gains. While many people want an income from their investments, what they actually need is a regular payment and that’s not necessarily the same thing.  

One individual who is benefiting from the low interest rates said: “I have to admit I am enjoying this extended mortgage holiday… been so long now am starting to forget what it was like to be hit with £1,400 a month mortgage. I switched it to a interest only tracker to get it to below £1K a month in 2005, then when interest rate were cut to 0.5% it fell to just £200 a month, which is even less than my council tax. Going to be tough when rates go back up to 6%, although i doubt we will see 6% rates before my mortgage needs to repaid in 2026.”

The low interest rate may also provide a helping hand to the struggling housing market. Housing economist Martin Ellis from the Halifax said: “Interest rates are likely to remain very low for an extended period, which will support the improved mortgage affordability position for homeowners. As a result, we do not expect to see a significant fall in house prices.”

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