Interest Rate Update 27 Octber 2010

UK Interest Rate: 0.5%

UK Interest Rates Forecast: Rates will remain low for some time

Mortgage Lending Reaches 18-Month Low

New figures from the British Bankers' Association (BBA) have revealed that mortgage approvals for house purchases reached their lowest level since March 2009 in September.

Gross mortgage lending was 10% lower than in September 2009, but interestingly, net mortgage lending increased by £1.6bn in September. This shows that mortgage repayments are holding up well – net mortgage lending is calculated by subtracting repayments from gross (total) mortgage lending.

According to BBA statistics director David Dooks, "Demand for mortgages remains low despite more properties on the market and falling house prices." This suggests that contrary to what many in the housing industry claim, the real problem is not mortgage availability but the combination of low consumer confidence and still-unaffordable house prices.

Could Improved Growth Figures Trigger Early Rate Rises?

This week saw the announcement of better-than-expected economic growth figures for the UK. One consequence of this is that the financial markets have begun to speculate on the likelihood of the Bank of England raising the base rate earlier than expected – albeit still not until 2011.

Bank of England MPC member Andrew Sentance has been advocating an increase in interest rates for several months now but has, up until this point, been a lone voice. It will be interesting to see if November's MPC meeting throws up a different result.

Most forecasts still predict that the first rate rise will not come until some time in 2011 but market traders are now expecting two rate rises in 2011, rather than just one – meaning that the base rate could reach 1% by the end of 2011. This would cause an increase in mortgage payments for anyone on a tracker mortgage and would probably also trigger an increase in most lenders' variable rates.