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When Will Interest Rates Go Up?

Do you remember the news headlines about interest rates just over a month ago?  On 17 July 2015, The Governor of the Bank of England Mark Carney warned the nation that the decision to raise interest rates “will likely come into sharper relief around the turn of the year.”   Unemployment figures for July had plateaued at 5.6% and with some sectors claiming they were struggling to recruit, wage rises had crept up to 3%.  The current inflation rate of 0.1% has largely reflected falls in food and oil prices that began in Autumn 2014.  The theory was that once these are factored out of the year on year inflation figures in Autumn 2015 along with wage increases and renewed economic growth we will see upward inflationary pressures.  The bank would likely want to gently apply the brakes with a small interest rate increase, probably from 0.5% to 0.75%.

I was very surprised that the governor was not more mindful of difficulties in the EU and Chinese economies.  Since his announcement in July, the Greek prime minister has called an election and I am a firm believer that we haven’t seen the end of the Grexit debacle.  That – along with Russian sanctions – will continue to have an impact on the Eurozone economies.  The slowdown in China and stock market fragility were already featuring in the business and finance pages in the press in July and we have now seen big stock market falls over the past few days.  A slowdown in China will do nothing to prop up oil prices so I don’t forsee any inflationary pressures coming from energy.  Mid August, most economists were suggesting the next rate rise would be in the first half of 2016, we are now seeing a switch in predictions to the second half of 2016 and possibly not until 2017.  My money is on Autumn 2016.

I think the Bank of England and Chancellor were in cahoots this Summer to put the brakes on house price inflation.  The combination of interest rate fears, increased stamp duty for properties over £1million and taxation for landlords and tightening of lending following the mortgage market review have subdued the market.  Many agents expected business to pick up after the May general election, but in many parts of the UK, people have been reluctant to put their properties on the market, creating a lack of supply.  In the capital, this could threaten to stoke up house price inflation again, but decreased demand in prime central London from overseas investors is keeping price rises subdued.  Developments in China could multiply this effect.

Lenders seem to have accepted that normalisation of interest rates is on the horizon and have reduced the margin between their mortgage rates and the Bank of England base rate.  As a result, there are some brilliant rates out there and now is a fantastic time to remortgage.  Two year tracker rates are cheaper than fixed rates and I think it’s worth risking a variable rate as you should get at least one year before rates start to go up.  Moving to a product that is closer to base rate now is a good idea so that your rate will be lower when bank rate increases.  For example I have two buy to let mortgages currently at 3.49% and I’m planning to move them to a 2.49% 2 year tracker product.  Many lenders offer competitive loyalty rates now or allow you to transfer to their new business products, this saves you the hassle of moving to another lender.  Most London landlords should have built up equity over the past couple of years so move to a 65% LTV product if you can and get an even lower rate.  Browse through rates at NLA Mortgages or go to www.moneyfacts.co.uk to find the best products.

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