Are interest rates on the way up?

Nia Williams

January 20, 2010

The rate of inflation rose from 1.9% in November to 2.9% in December 2009, surprising many economists who were predicting a figure of 2.4%. But what impact will this have on interest rates?

The Confederation of British Industry (CBI) has already predicted that interest rates will start to rise as early as the spring, hitting 2% by the end of 2010 with no further rises in 2011. And only last week, Andrew Sentance, a member of the Bank’s Monetary Policy Committee, hinted that interest rates would be hiked if inflation was to rise suddenly. So will rate rises come sooner than thought?

Commenting, Mark Bolsom, head of UK trading desk at Travelex, the FX payments specialist, said: “… we feel that, in this current situation, it would be nigh on impossible to control inflation through raising interest rates. Whilst Britain faces down a period of fiscal tightening, tight credit controls and the prospect of higher taxes and spending cuts, the Bank would be unwise to raise interest rates and choke off recovery in its infancy.

“The Bank have left themselves exposed to inflation, as the economic situation is far too fragile for them to exercise traditional methods of inflationary control. With that in mind, we are standing by our prediction that the banks will keep rates on hold at 0.5 pc until 2011.”

Andrew Montlake, director at independent mortgage broker, Coreco, is not so sure. He said: “[The] inflation figures will bring to an end the rate complacency we have seen among borrowers over the past year or so.

“This is a real shot across the bows for borrowers, many of whom are quietly banking on a low interest rate environment in the short term. But this is a risky game to play.

“More people than ever are on variable rate mortgages at present, either because they cannot remortgage or because they have decided not to given the discount on variable rates relative to fixed. If rates rise to contain inflation then many borrowers will find themselves with significantly higher monthly payments.”

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