Interest rates – how low will they go?
December 15, 2007
With inflation quickly spiralling out of control the Bank of England hiked up UK interest rates five times between August 2006 and July 2007.
This put significant pressure on homeowners with variable rate mortgages, as their repayments shot up by a considerable amount over a relatively short period of time. Those on cheap fixed rate mortgages that were due to expire over coming months also found themselves facing financial difficulties due to the amount by which lenders’ standard variable rates had gone up. Between July 2007 and November 2007 the interest rate remained unchanged at 5.75% - the level it had reached following the series of five 0.25% hikes.
However, signs of a slump in the economy coupled with the effects of the credit crunch meant that the Bank of England had to respond to calls to cut interest rate sooner or later, and sure enough in the first week of December the central bank confirmed that it had decided to cut the base rate by a quarter point taking it down to 5.5%. This has proven good news for many industry professionals as well as homeowners on variable rate mortgages.
Analysts and economists are now predicting that interest rates will continue to come down throughout 2008, and many now predict that the base rate could fall as low as 4% by the end of 2008. During a recent survey carried out by This is Money a number of analysts and economists from high profile firms gave their thoughts on what might happen with the base rate in the year to come. Below are some of the views given by these industry experts.
An official from Bear Stearns stated: ‘The Bank of England has pulled the rip-cord to much lower rates. We could well be staring into the jaws of UK rates coming down to 4% in this cycle. The doves’ concerns about downside risks to growth have taken much higher priority over the hawks’ fears about upside inflation risks. The background worry right now is that the UK could dip into recession next year.’
He added: ‘We expect another cut in January, with rates to target 5% by the second quarter. UK rates should be at 4.5% by the end of 2008, possibly even lower if the downturn is more severe. This has been a cut to alleviate the credit crunch and provide a rescue remedy for growth. Lower rates should help to put a prop under the UK housing market.’
An economist from Deutsche Bank said: ‘Not surprisingly, the statement accompanying the decision highlights the growing downside risks to growth and the role the credit crisis is playing. Near term at least, they will continue to watch CPI closely, but slower growth is expected to dampen inflation ahead. We expect rates now to fall to 5% by mid 2008.’
An industry professional from BNP Paribas said: ‘Tighter credit conditions are cited as key to the expected slowdown. Nothing is in there to change our view that more evidence of weakness in the coming weeks and months will be followed by further cuts in policy rates to keep inflation on target over the medium term. We expect another 25 basis point cut by February, with the upcoming festive spending season very important.’
An economist from Deloitte and Touche stated: ‘Today’s decision by the MPC to cut interest rates from 5.75% to 5.5% is the first step in a prolonged period of monetary easing that could see rates fall very sharply. I previously thought that rates would drop to 5%, but I now think that they could eventually be cut all the way to 4%. Inflation is likely to rise further in the coming months. However, the rise in interbank interest rates means that the risk of a very sharp and prolonged economic downturn is growing by the day.’
Alan Wright
15th December 2007
Recent additions:
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