Latest Predictions for Mortgage Interest Rates

The Bank of England has been stuck in a dilemna between the high inflation rates and the slowing economy. However, recently, the economic slowdown has accelerated. Given ongoing problems in the credit market, it makes it more likely interest rates will fall. Interest rates could well fall by 1% in the next 12 months.

Forecast for Inflation

Inflation increased by more than the bank hoped. The inflation is mainly cost push, though is expected to fall back in 2009, as oil prices moderate and the economy slows.

The main reason for this spike in inflation, despite lower growth and falling house prices, is increased cost push inflation. This has particularly come from rising food prices, rising energy prices and rising import prices.

Because of the rise in inflation the Bank  have been reluctant to cut rates in the coming year. But, the economic slowdown and rising unemployment present a more pressing problem.

Forecast for Housing Market

House prices have been falling and the number of property transactions has collapsed. This is causing concern because of its knock on effect on the economy. The bank would like to see a period of house price stability.   If house prices do stagnate there may be less need for future interest rate cuts, however, that is unlikley at moment.

Forecast for the Economy.

The Bank predict a slower rate of growth for the UK this year, in particular the City of London will see declining incomes growth. However, they do not feel there is a risk of a recession. As M King said:

Once you get away from London, and certainly the City, and away from the financial sector… the mood music is very different,

Forecast for Mortgage Interest Rate Predictions

The Bank promised little in the way of base rate cuts this year. Furthermore, they suggested that any base rate cut may not actually get passed on by mortgage lenders. In the past few years mortgage lenders have reduced their profit margin. Therefore, the global credit crunch may encourage lenders to increase the margin between base rates and standard variable rates. Therefore, homeowners may not benefit from any rate cut.

Overall Conclusion

The economy has slowed by more than expected therefore, interest rate cuts are likely to come soon.

• Bank of England Inflation Report