Interest Rate Update to 4 November 2009

UK Interest Rate: 0.5%

UK Interest Rates Forecast: Rate rises expected by mid-2010

Bank Rate Expected To Rise by Mid-2010

The Bank of England’s latest Inflation Report, published this week, shows that the MPC expect the CPI measure of inflation to rise above its 2% target by early 2010. This means that they will have to take on the task of controlling inflation – having been combating its opposite, deflation, for the last year or so.

The primary method the Bank uses to control inflation is interest rates. This inflation report confirms the strong likelihood of the Base Rate rising by early-mid 2010 – meaning that all mortgages tied to the Base Rate will also rise.

Continued low interest rates have encouraged many borrowers to take out tracker mortgages – all of which are tied to the Bank of England Base Rate.

Rising interest rates are expected by many economists, too. Bank of Ulster Chief Economist Richard Ramsay says that “we maintain our view that the UK will begin its rate rises by mid-2010.” He went on to note that “rates remain at record [low] levels and even with rate increases they will remain below ‘normal’ levels for some time.”

Mortgage Lenders Tightening Affordability Tests

Mortgage lenders believe that interest rates are likely to rise, too. Several major mortgage lenders have now tightened the affordability tests they apply to new mortgage customers.

To do this, lenders test whether prospective mortgage customers could afford to keep paying their mortgages after interest rates have risen. Each lender sets an interest rate for this test that is above the current interest rate they are charging. What has happened is that mortgage lenders are increasing this test rate to make the affordability test harder.

It looks like the days of falling interest rates are pretty much over.