Thursday, 14 October 2010

Where to for UK Interest Rates in 2011?

Well we are well into Q4 of 2010 now and the consolidated predictions of the City economists I published a year ago have been proved good to date; but the future is rocky.

The Bank of England is trapped in the zone of a UK economy experiencing internal deflation and yet importing inflation (from China, commodities) via its trade deficit. A peculiar and hard set of circumstances to judge; so hard that it has not done anything year to date....

This is very much as was predicted by economists last year. However, now they all thought that in Q42010 the recovery would be well underway and interest rates could begin to rise. Instead we find the Bank of England thinking about lowering real rates further by doing more Quantitative Easing.

So are rates going to shoot up next year? The answer to which maybe is will it matter? Already the cost of funding to UK banks is currently only low because they are accessing the UK Special Liquidity Window (i.e. more taxpayer lending, albeit profitable) and the European scheme. As comments to the previous post pointed out, this will end next year and force banks to come to market. This is then going to push up real rates and Libor may again climb 100 or more basis points (1%) over the Bank of England rate. banks are going to have to raise capital to avoid a bigger crunch than this - so this is No time to won bank shares either.

What is unlikely to happen is that rates this time next year are at 0.5%. Last year it was pretty clear that the headwinds were such that rates would stay low; Cityunslicker took out a variable mortgage with a low rate to take advantage of this. Next year the economists may well be proved right, with Bank liquidity needs forcing real rates to rise (in which case the Bank of England will have to follow, or else disband itself as it becomes meaningless - but it won't be sold to the public this way). However, given the weak state of demand in the economy, rates are not going to shoot up to combat external inflation that we can little about and 4 rate rises will be a lot - still then keeping rates under 2%.

Time yet then to wait before fixing a mortgage - less time though to get one as Banks suffer another bout of credit crunching.

14 comments:

Dick the Prick said...

I fortunately managed to blag a variable rate mortgage a couple of years back but went in last week to see if I could borrow more and the cheapest I was offered was about 4% I think. I didn't really shop around but at the moment I've got it at 1.49% which is a very sexy rate indeed. Shame i'm skint really or i'd be banging as much as I could into it (out of principle rather than price).

Anywho - will wander off and see which QUANGO's have been ended - heady days, heady days.

Blue Eyes said...

Anyone know of any decent high-LTV remortgage rates???

Steven_L said...

So my selling short Sept11 interest rate futures looks inspired then?

Was 99.00 when I got in, you can get 99.07 now. I nearly sold some more this morning after reading this, but eggs, baskets and all that!

Philipa said...

ConDems have already halved the housing contribution to benefit claimants who have a mortgage, from 6.x to 3.y. This put a substantial burden on people on benefits, but not on those who rent (which is grossly unfair). If rates rise as you predict then people will be worse off and end up losing their homes and requiring social housing. It's a disaster waiting to happen and the ConDems care not a jot.

Electro-Kevin said...

Couldn't you switch to interest only, Philipa ? Pay minimum if needs must ?

Electro-Kevin said...

Have you looked at the John Charcol site, Blue ?

Electro-Kevin said...

CU - I'm in a bit of a muddle.

A mortgage broker has offered me 3.24% with the Woolwich on an interest only tracker. The idea being that I overpay each month and benefit from the fact that the interest is being calculated daily. There is also a drop-lock facility which means no redemption penalty should I choose to fix with one of their products.


Presently I am three years from ending a fixed repayment mortgage at 4.79% with Britannia. The cost would be £1800 to get out of it.

I need to consolidate loans. Luckily I have good LTV and wage/debt ratios. But the figures look bloody frightening nonetheless.

A couple of 0.5% interest rate rises would negate any advantage of switching - in so far as I can see it - I'm tempted to sit where I am. What would you do ?

Not holding you responsible for anything should the future turn out differently to what you imagine.

PS, I have tried one of the lower rate loans (HSBC @ 2.19%) but the obstacle there is that they require you to use solicitors for various things and will not combine debts with the mortgage as will the Woolwich. The monthly repayments are not much different when this is taken into account.

Steven_L said...

Just sell it EK before it crashes another 30%!!!

Electro-Kevin said...

It's a roof over my head and I live in it cheaper than I could rent it.

CityUnslicker said...

Phillipa - but £2400 a month...I rented a 4 bed detached for 5 of us in a leafy lonodn suburb for £1400 just this year. This can't go on.

EK - don;t rates bound to go up more than 1% before you make your £1800 back I reckon. Do Britannia do linked current accounts though where you could get an overdraft at a good deal to help reduce your other debts?

cpmppi said...

CityUnslicker,

I am very much of the same mind... the Bank of England has let inflation expectations deanchor and relative to the traditional Taylor Rule for setting interest rates (even accounting for all the so called "one offs") has policy way too loose.

More details here:

http://macro-man.blogspot.com/2010/10/mervynflation.html

cheers,
cpmppi

Anonymous said...

You need an editor, or a sub-editor, or maybe to read it through a few times before posting, something which a lot of bloggers don't do.

Several misspellings and clunky sentences make this pretty hard to read, which is a shame because it's on a very interesting topic.

Philipa said...

CU - £2400pm?? Try £160pm as opposed to paying over £600pm in rent. As EK quite rightly says, it costs more to rent. So don't really get your point(?)

Philipa said...

EK - thanks but already done that to make it manageable on benefits. It only lasts a year and lender won't necesarily extend.