Interest Rate Update 25/8/10

UK Interest Rate: 0.5%

UK Interest Rates Forecast: Low rates could give false sense of security

Mortgage Lending Up 5% In July

Total mortgage lending rose by 5% in July, according to new figures from the Council of Mortgage Lenders. Despite the 5% rise, however, it was still 3% below the level seen in July 2009.

Commenting on the figures, CML economist Paul Samter said:

"It is difficult to see anything other than a slow market for the rest of this year as underlying activity remains subdued. The rest of 2010 is likely to see rather lower lending and transaction numbers compared to the same period last year."

Could Interest Rates Hit 8%?

Most economists have different opinions on the future of interest rates, some more extreme than others. One person who is at the far end of the spectrum is Andrew Lilico, chief economist at the Policy Exchange think tank.

Lilico recently warned that there is a high risk of a return to "boom and bust" and that one of the consequences of this would be high inflation – and high interest rates. Lilico believes that in the event of the RPI measure of inflation reaching 10%, interest rates could have to rise to 8%.

The result of this would be that mortgage rates would probably exceed 10% - and might even reach 12%-14%, a level not seen since the early 1990s.

I would stress that Lilico's forecast is considered fairly extreme – but there is an important point to be made. A Bank of England rate of 0.5% is not normal and cannot last forever. One day, interest rates on mortgages will have to rise. Homeowners need to start planning for this now – rather than waiting until it's too late.