Interest Rate Update 2 March 2011

UK Interest Rate: 0.5%

UK Interest Rates Forecast: Rates may rise soon but it isn't obvious when

Mortgage Lending Rises – BoE

The latest Bank of England figures show that mortgage lending rose above December levels in January but still remains below November levels.

A total of 99,681 mortgages were approved in January – up from December's figure of 94,430 but substantially below November's 104,353 and just below the six month average of 100,000.

Mortgages for house purchase followed a similar pattern but remortgage approvals did rise above the six month average of 30,407 to 33,498. This is likely to be a reflection of a move to remortgage onto fixed-rate deals in the face of growing fears of interest rate rises.

More Lenders Increased Fixed Rates – But Rate Rise Prospects Unclear

This week saw more mortgage lenders increase their fixed rates, as financial market swap rates, which set the cost of fixed-rate mortgages, continue to rise. Two and five-year swap rates were 1.77% and 2.94% respectively at the end of January – they are now 1.88% and 2.99% respectively.

In the background to this, speculation about the likelihood of a Bank Rate rise grew. Despite this, Bank of England Governor Mervyn King told a committee of MPs that increasing the Bank Rate simply to make a gesture against inflation would be "self-defeating".

King also observed that the current low interest rate environment is one reason house prices have not fallen further – any substantial increase in interest rates could inevitably drive down house prices as household incomes are stretched still further.

Despite this, speculation is rife that the MPC could vote to increase the Bank Rate in the next few months, although probably not as soon as next week, when they next meet.