Shock Rise In Interest Rates
The Bank of England shocked markets yesterday by once again rising its base lending rate by a quarter-point to 5.25%. This is now the third time that the Bank of England has announced a quarter-point rise in base rate since August – and the second time that the announcement of an interest rate rise has taken the markets by surprise.
Questions now being asked whether or not the British general public can continue to afford the cost of these announced shock rises in base lending rate by the Bank of England? One thing that we can be sure of is that it will not be long before home loan lenders in the UK raise their lending rates in-line with the Bank of England’s quarter-point increase. Indeed, those of us who have an adjustable rate mortgage can now look forward to the very real prospect of higher mortgage repayments at a time when paying off our Christmas and New Year credit card spending means money is already tight.
Unlike previous rises in the base lending rate announced by the Bank of England, yesterday’s announced increase was doubly shocking in that hardly anyone had forecast that it would occur. Indeed, the simple fact that so few analysts had foreseen any reason why base lending rate should rise has the same analysts now speculating over why it has happened at this time.
General consensus appears to be that the latest rise in the base lending rate is a result of as yet unseen figures that indicate inflation in the UK is exceeding the Bank of England’s 3% maximum permitted figure, which is 1% above the 2% target figure set by the Government. With UK inflation rate running at 2.7% in November, it’s highest rate in a decade, this would appear to be the most obvious explanation.
Clearly, however, this is not going to help the average UK homeowner. Worse, many economist are now speaking openly of further interest rate increases during the course of 2007 if inflation cannot be brought under control. With many UK homeowners having mortgaged themselves to a limit that leaves little room for maneuver, continued interest rate rises is certainly going to result in a bleak time.
Interestingly, however, the Building Societies Association (“BSA”) does not foresee increases in interest rates as damping the wishes of most of us to be on the housing ladder. Adrian Coles of the BSA commented: “The last two rises seem to have had little dampening effect on the housing market.”
The question that exists, however, is: “How much longer can we, the British public, continue to afford higher housing prices and increasing interest rates?”
Alisdair Milton
16th January 2007
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