Interest Rate Cycle in UK

Amidst all the gloom surrounding the UK housing market it is worth putting current difficulties into a historical perspective.

Graph Showing Mortgage Interest Rates in UK

In 2008, Interest Rates are currently at 5.5% and most predictions are for UK interest rates to fall.

The lowest interest rates in the UK were reached a couple of years ago when the base rate fell to 3.5%, since then the MPC have increased interest rates because of the improved UK growth. (The strong performance of the UK economy is illustrated by the significant fall in unemployment.)

Therefore, the peak of the interest rate cycle this time was only 5.75%, far lower than previous peaks in 1990 and 1980.

One thing to bear in mind is the real interest rate (difference between nominal interest rates and inflation.) Lower inflation rates in the UK have enabled lower nominal interest rates.

However, the fact that interest rates are able to fall further suggests that we need not panic about a collapse in the housing market. There isn’t anything at the moment to suggest that mortgage interest payments are going to shoot up. True, there may be little room for house price growth, but, there is also not much evidence of an imminent collapse.