Interest Rate Update to 22 December 2010

UK Interest Rate: 0.5%

UK Interest Rates Forecast: Rates may rise in 2011

CBI Forecast Rate Rise In 2011

The Confederation of British Industry (CBI) – the UK's main lobbying organisation for businesses – has forecast that the Bank of England will start increasing interest rates in spring 2011.

The CBI then expects that the base rate will continue to increase gradually until mid-2012, when the rate of increase might speed up, leaving the Bank Rate at 2.75% by the end of 2012.

Mortgage Rates May Not Rise With Base Rate

Other leading economists have made the same prediction as the CBI, and some, such as Simon Ward of Henderson, have expressed surprise that the MPC has not already lifted rates. However, Ward was keen to point out that an increase in the base rate might not automatically result in a corresponding increase in mortgage rates.

Ward's point is that banks and building societies have not passed on the full scale of the Bank's rate cuts to mortgage borrowers – indeed, they have not been able to as their own borrowing costs have not fallen as far as the Bank rate has fallen. The flipside of this, of course, is that bank's mortgage rates may not necessarily automatically increase as soon as the base rate is increased.

Of course, borrowers with tracker rate mortgages will not benefit from this situation – their mortgage rates are normally formally linked to the Bank of England base rate and so will automatically rise when the base rate is increased.

Two-Thirds Of Mortgage Borrowers Have Variable Rates

Two-thirds of mortgage borrowers currently have variable rate mortgages of some kind, according to the Bank of England - an unusually high proportion.