Rates to remain low with fixes more expensive
This is according to John Charcol’s Ray Boulger, commenting on the MPC keeping rates at the same level for almost two years.
He said: “… signs for 2011 Q1 are not promising, with consumer confidence plummeting and even John Lewis reporting lower sales. While there is a serious risk of 2011 Q1 GDP taking us into double dip territory it is hard to see the justification for a bank rate increase, especially when the two main factors causing inflation – VAT and commodity price icreases – will not be even remotely affected by a bank rate increase.
“As long as wage inflation continues to be well below CPI inflation the squeeze on living costs this imposes on consumers will have a similar impact to a rise in interest rates. A bank rate increase now would have a minimal impact on inflation but the message it sends to consumers would seriously increase the risk of a double dip recession, which would be politically very embarrassing for the Government.
“This suggests that the 0.5% Bank Rate will not only reach its second birthday next month but also notch up several more months before a rate rise is justified. With arch hawk, Andrew Sentence, due to retire from the MPC after the May meeting it will be even more interesting than usual to see whether The Chancellor replaces him with someone of the same ilk or someone whose view on interest rates is more in keeping with The Chancellor’s position.
“…John Charcol still believes variable rates offer better value for most borrowers at present, although fixed rates will get more expensive in the short term and so anyone wanting a fixed rate should snap one up quickly. As a general rule anyone paying a lender’s standard variable rate of 3.5% or over, with at least 15% equity in their home, will benefit by switching to a new product, but not necessarily a fixed rate.
“A gap of at least 2% between the best variable rates and the best 5 year fixes is only justified if bank rate rises relatively quickly and averages at least 2.5% over the next 5 years.”