Interest Rate Update 18/11/09

UK Interest Rate: 0.5%

UK Interest Rates Forecast: Rises expected in 2010

Inflation Rises Faster Than Expected

New figures from the Bank of England show that inflation is rising faster than expected. The government’s favoured CPI measure of inflation rose to 1.5% in October, up from 1.1% in September.

Despite this, the RPI measure of inflation – which includes mortgage interest – is still in negative territory, at -0.8%. This is partly due to current low mortgage interest rates.

The challenge facing the Bank of England will be finding a balancing act that combines keeping CPI inflation in its target 1%-3% range without risking dampening any general economic recovery. The first signs of split opinion in the Bank’s Monetary Policy Committee emerged this month, as two members of the committee voted against its decision to maintain the Bank Rate at 0.5% and increase quantitative easing by £25 billion.

While no one is suggesting an increase in the Bank Rate just yet, this latest addition to the QE program is likely to be the last, meaning that the MPC will only be left with one tool – interest rates – to control the economy.

What Does This Mean For Mortgage Rates?

In the short term, nothing. This week saw further signs of competition returning to the mortgage market as more lenders cut their mortgage rates and introduced more competitive deals for borrowers with only 10% deposits.

In the longer term, the Bank Rate will eventually have to rise and this will result in increased mortgage payments for many borrowers, who are on variable or tracker rate mortgages. This is likely to happen at some point in 2010, but it is not clear just how soon this might be.