Consumers praying rates won’t rise!

Posted: 3rd Feb 2016

By Rory McGimpsey

Ever since the Bank of England effectively froze the Base Rate during the global economic downturn, the burning question on the lips of borrowers has been: When will rates rise again ? The question is particularly relevant for those on variable/ tracker mortgages (and indeed the few still happily tied to interest only deals) for whom a rise in interest rates could have potentially perilous consequences.

Anxious consumers will therefore wait with baited breath as Bank of England Governor Mark Carney is expected this week to unveil his plans for the remainder of 2016. It has been widely reported that Carney will use this Thursday’s quarterly inflation report (4 February 2016) to inform us that the UK economy is performing less impressively than forecasted and that growth has stalled somewhat. According to an article by Hugo Duncan on “The Bank’s official forecasts for economic growth and inflation are likely to be trimmed – seemingly kicking an interest rate rise into the long grass.”

While such an affirmation may be alarming in the wider economic context, it is sure to be welcomed by millions of consumers and borrowers throughout the land. In what’s been a recurring theme of the financial crisis, borrowers are anxiously hoping that rates won’t rise and thus send their household finances into relative meltdown. Such anxiety is particularly pertinent for insolvent debtors. As we know, disposable income is invariably at a premium for insolvent individuals at the best of times, but hard pressed personal finances stand to be pressured even further if rates are hiked. Indeed, even a modest rise in the Bank of England base rate could have a catastrophic effect on the everyday finances of millions of individuals in debt.

While reiterating the independence of the Bank of England, the government has suggested that an interest rise could be imminent, if not in the next few months then certainly in the foreseeable future. The Independent website quotes Chancellor George Osborne as saying: “I’ll make this point: of course just before Christmas the US saw a rise in interest rates – the Federal Reserve put interest rates up. That was the beginning of the exit from the very, very low interest rates and ultra-loose monetary policy that was put in place during the crash. Of course there will come a point where that happens in Britain – a decision made by our independent central bank.”

Therefore, it’s fair to surmise that it is a question of when, rather than if, rates will rise. The predicted rise in interest rates has been linked to the economic upturn that has been evident in the last couple of years. It’s ironic that the possible stalling of this growth is the crumb of consolation borrowers are clinging to in relation to interest rates. The Financial Times agrees that rates are unlikely to rise massively in the immediate future, while suggesting that a modest increase is likely. In discussing economic predictions for 2016, the FT writes “British households can look forward to another year of ultra-low interest rates, with most economists expecting a maximum (rate of) 1 per cent by the end of 2016.”

The effect of a rate increase on those with tracker mortgages is obvious, but those with interest only loans stand to potentially lose even more precious disposable income. The era of extremely low interest rates was never going to last forever of course, but that doesn’t make a rise any more palatable for millions of borrowers who have come to rely on the low base rate. That said, a rate increase will at least be tremendous news for cash-strapped savers. Every cloud has a silver lining after all! If Mark Carney confirms an interest rates freeze, millions will breathe a sigh of relief. It might still be best to brace ourselves for an eventual increase, however. Anything else is merely delaying the inevitable.

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