Interest Rate Update to 2 February 2011

UK Interest Rate: 0.5%

UK Interest Rates Forecast: Mortgage rates will continue to creep up

Rate Rise Prospects

Although last week's GDP figures put a downer on expectations of a Bank of England rate rise, stronger than expected manufacturing figures have counterbalanced that slightly this week.

Despite all of this, a rise in the Bank Rate does not look that likely. Reasons for this include wage inflation, which is still under control, and the fact that increasing interest rates might not have any effect on inflation, which is largely being caused by the rising prices of oil, various imports and taxation levels. None of these will respond to a rise in UK interest rates.

If we look at UK mortgage rates instead, we see that lenders are continuing to adjust their fixed rates slightly upwards. Some mortgage brokers are saying that this is a result of the recent growth in people remortgaging onto fixed rate deals to protect themselves from any increase in interest rates. Mortgage lenders have seen demand for fixed-rate products rise faster than expected, so they have increased their fixed interest rates slightly to control demand.

According to RICS, mortgage rates are likely to remain stable or increase, as it believes that "it is unlikely that the enlarged spreads [profit margins] that lenders are enjoying on mortgage products will narrow near term.

Mortgage Lending Falls In December

The latest figures from the Bank of England show that total "lending secured on dwellings" – mortgages, to you and me – fell by £300m in December. Looked at in more details, the number of new mortgages approved for house purchases fell by nearly 5,000, from 47,287 in November to 42,563 in December. The number of remortgage approvals also fell substantially, from 34,467 in November to 30,595.

Of course, people have to look at houses to buy them and December's bad weather and the interruption caused by Christmas is likely to have reduced house-hunting activity well below normal levels. It will be interesting to see if mortgage approvals rise again in January, as the weather is back to normal and the festive season is over.