| UK
Interest Rate: 5.00%
UK
Interest Rates Forecast: Strong likelihood of increase
to 5.25% in Q1 2007
Interest
Rates Likely To Peak at 5.25 per cent?
Most
analysts now believe that the Bank of England's base
rate will almost certainly be increased
to 5.25 per cent early in 2007, probably in February.
City traders have already priced in such a rise and
the case for another anti-inflationary increase has
been further strengthened by reports from retailers
of a strong Christmas.
On
balance, it seems likely that rates will peak at 5.25
per cent. Howard Archer, chief UK economist at Global
Insight, believes that rates are likely to start and
end 2007 at 5.0 per cent.
However,
some analysts disagree. HSBC are forecasting no rate
rise in February and two 0.25 per cent cuts in the second
half of 2007, leaving the year end rate at 4.5 per cent.
When
Will Affordability Bite?
Although
they may differ on specifics, the broad story of all
house price forecasts for 2007 is that growth will be
stronger in the first half of the year than the second.
The
main reason given for this is that most analysts expect
the combination of higher interest rates
and increased house prices to have a negative impact
on affordability – people's ability to pay for
something from their income.
However,
homeowners should not take this as a sign that the Bank
of England will pre-emptively lower interest
rates to protect consumers – according
to Howard Archer, chief UK economist at Global Insight,
the Bank of England's position on personal debt problems
is that they are "more of a personal tragedy for
those involved" and do not have "serious wider
economic consequences".
This
means that the Bank of England may consider the rising
levels of personal bankruptcy and home repossession
as an unfortunate side effect of their drive to bring
down inflation and not as a major problem in itself,
leaving overly-indebted consumers at greater risk in
2007.
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