News

UK Interest Rates Down Slowly

At a recent briefing, James Carrick of L & G Investment Management said the Bank of England would lower interest rates to 5% but they would be reduced slowly.



He stated that next year will be another where markets struggle and interest rates will remain higher than people expected.

UK inflation rates were likely to be above target and therefore keep interest rates high, a problem that would be felt in world markets.

Even new markets are caught in rising inflation including China whose inflation is running at 6.9% compared to the UK’s at 2.1%.

Those investors who have been worried about the sub-prime crisis have now moved their money from the US to relatively safe new markets.

World markets are expected have little growth and current markets may find conditions worsening with the US possibly having a 30% chance of recession during the coming year.

Investors say rate to drop

According to a recent survey 70% of investors consider interest rates will drop during this year even so 69% think now is a good time to buy property.

The buy to let market is expected to underpin the housing market in 2008 and signs are that investors and landlords are intending to add to their portfolios, as property prices are more negotiable at present. Provided property is being bought for long-term investment it will not be affected by any price drops that may occur this year.

About 50% of landlords did say they were at present being financially stretched with mortgage repayments together with other debts and commitments.

Interest Rates Ready For Move

Lenders were not surprised at the interest rate remaining at 5.5% this month but many think next months decision must be for a reduction.

It is considered that a further cut in interest rates will soon follow.

There are definite signs that economy is slowing and the Monetary Policy Committee will look at all available data next month.

Some say it was a wrong decision this month as mortgage approvals fell drastically in December.

Confidence needs a boost within the housing market and this will have an impact on the economy.

Dithering MPC

It is felt by many that the Bank of England Monetary Committee thought more about fears that inflation may over rise rather than the weakening economy, putting pressure on all sectors of the housing market, when leaving the interest rates at 5.5%.

It is thought that is does not give 2008 a positive outlook and will hit both businesses and consumers hard.

Economists on the other hand were pleased that the interest rates had remained at 5.5% and welcomed the delay as financial conditions have eased as a result of easing of sterling and a fall back of about 100 basis points in three month inter bank rates.

Where Are Interests Rates Going

Welcome relief has been bought to the three-month money market with suggestions that an interest rate cut of a quarter of a per cent is likely before Christmas. This will of course bring some Christmas cheer to borrowers and alsogive more confidence to the sector.

Outlook Uncertain

Although house price growth is still in double figures it is considered likely that a slowdown of the market is on its way.

Affordability, interest rate rises and wages rising slower than house prices have caused the slowing of the market along with the increased risks rising from financial problems in the market. All of these will add to the slowing economy of 2008.

For nine consecutive months buyer enquiries have dropped at the fastest rate for three years.

Site visits to new builds have slowed and asking prices turned negative in August for the first time since 2005. There could be an expansion freeze for many companies should the turmoil recently affecting the market has a great impact over the next few months especially if inter-bank lending slows.

It is probably London that is the most vulnerable that would lead to bonus and job cuts across its property market, but even in August London’s house price growth was the strongest of any UK region.

It is possible that buy to let landlords may soon have to find more equity to be able to obtain mortgages. Novice landlords may find banks less inclined to give loans without sufficient loan to value ratios as these become tighter.

Bank of England Base Rate

The Bank of England Monetary Policy Commission were split three ways when it came to deciding April’s interest rates. Two of the nine members wanted to keep the rate at 5.25% but six others voted for a 0.25% reduction and one member wanted a reduction of 0.5%.

A Global Insight economist considers a further reduction in May unlikely but could not rule it out. A forecast of a 0.25% reduction to 4.75% is likely in June but if credit conditions worsened this could happen on May 8th when the next interest rate decision is due to be made.

It is thought that the base rate will fall to 4.25% by the end of 2008 and to 4% in the first quarter of 2009.