Bank of England warns of Interest Rate Rise

In a speech at Lincoln Cathedral last week, Bank of England (BoE) governor Mark Carney said that he thought interest rates could rise around the 'turn of the year”.

In his clearest statement to date of the timing of a BoE rate rise, Mr Carney said he expected that the cost of borrowing would increase over the next three years from the current level of 0.5 per cent to around 2.25 per cent, which would be “about half as high as historical averages”.

Interest rates have now been set at 0.5 per cent for more than six years as the UK economy has recovered from the financial crisis.

The BoE is following the lead of Janet Yellen, chair of the Federal Reserve in the US, as she told the US Congress this week that the Fed was on course to increase borrowing costs before the end of 2015.

Mr Carey said the process 'would not be mechanical?, but might hinge on external factors such as changes in the exchange rate. 'The decision as to when to start such a process of adjustment will probably come into sharper relief around the turn of this year?.

An interest rate hike, albeit a small one, would have an impact on landlords' finances and would add to their pressures when combined with the reducing of landlord tax relief announced in the Chancellor?s Summer Budget.

Mr Carney said three sets of data would be critical in his decision as to when to increase interest rates: the pace of economic activity, the outlook for labour costs, and core inflation.

He advised investors to look beyond the date for the first rate hike and focus on 'the path?, which is likely to be gradual and would end at around 2.25 per cent, well below average levels of the past.

Historically he said, 'Short-term interest rates have averaged around 4½ per cent since around the Bank?s inception three centuries ago. It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historical averages?.

The BoE believes that the recent slide in inflation is temporary and mostly benign, and that there is little risk of the UK falling into a Japanese-style deflationary spiral.

?This temporary period of below-target inflation has provided a welcome boost to real household income,' Mr Carney said.

In Response to Mr Carney?s predictions, Sterling hit a new seven-year high against the euro Friday, reaching '1.4399, as the market continued to look forward to the prospect of a UK interest rate rise. This is in sharp contrast to the economies in Europe, Japan and China where governments are still heavily involved in fiscal 'easing?.

Experts are advising landlords not to panic but if appropriate to think about changing from a variable to a fixed rate deal if an interest rise would put them under pressure. Now could be the time to consider switching to a five-year fixed rate mortgage, with some very good deals available right now.

... LandlordZONE.


Article courtesy of LandlordZONE

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