Definition of Negative Real Interest rates - When the inflation rate is higher than the Bank of England Base Rate. Negative real interest rates are bad for savers and good for borrowers (assuming their income increases in line with cost of living)
The UK, is now experiencing negative real interest rates for the first time in 27 years.
- RPI inflation is 5.1% (rounded down to 5%) This is the most comprehensive measure of living costs
- RPIX inflation is 5.3%
- CPI inflation is 4.4% (this is the government’s preferred method, but, excludes housing costs and council tax)
- Base rates are 5%
- Food inflation is in double figures.
- Rising inflation and falling growth is known as ’stagflation’
This 16 year peak in inflation puts pressure on the Bank of England to increase interest rates (or at least not cut them. Inflation is now far above the government’s target of 2%. The Bank will also be concerned that the current spike in inflation will increase inflationary expectations and make it more difficult to reduce in the long term. (When inflation is high people will start demanding higher wage increases and this cements the higher inflation)
Any Good News on the horizon?
- Oil prices are starting to drop after their summer peak. Supermarkets like Morrison’s are cutting petrol prices. Lower petrol prices, would definitely help reduce inflation over next few months.
- Lower economic growth and rising unemployment is keeping a lid on wage inflation (although the downside here is that people are not experiencing increases in living standards)
What Will Happen To Interest Rates?
The MPC face a difficult dilemna. They will be hoping inflationary pressure work their way out of the system soon. They don’t want to increase rates with the risk of recession. But, they don’t like to see inflation above the target. I think they will keep interest rates the same at 5% for a few months and see how things develop.
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Everyone’s talking about the current state of our economy at the moment. Will we head into recession? Are we already in one? Whats my property worth? Will I be able to remortgage? What rate will I be looking at? How bad are things going to get?
The government, the Bank of England, the FSA, mortgage lenders, building companies will all tell you their side of the story, often with very conflicting views.
I thought it would be a good time to write and tell you all what I think is happening given what I’m seeing, reading and experiencing on a daily basis.
Its a nightmare!! Ha!
No. It’s not that bad really. As long as in the short term you are able to hold onto your job.
There’s many factors at the moment that have to be taken into account when trying to work out the economical future of the country. Property prices, oil and food prices, inflation, Mortgage rates and inter bank lending rates are some of the factors that need to be taken into account.
It all seems to also be centered around the property market and property is a good gague of how we are doing.
Everyone is talking about house price crashes and things continually getting worse. Which they will. But house prices have already crashed. The true drop however has not been realised yet as the figures are fudged due to not many properties selling.
Inflation is on the up so the normal thing for Mervyn King to do would be to put the base rate up. This would probably only cause more problems however. Not a good idea as then borrowers would be in more trouble and we would all be embarking on a very slippery slide.
They should hopefully stick at 5% for a while longer while the dust settles.
The credit crunch problem is caused by the lenders being so tight with their money. They are fuelling the whole scenario as they are unsure of the losses that they have already incurred. In the past when mortgages were written and sold the lenders could sell on their mortgage books to other companies. They can’t do that anymore as no lender feels safe buying another companies books that could be full of mis-sold mortgages. They don’t even know exactly what business they have on their own books let alone the books of another company. For this reason the lenders refuse to lend to eachother. This means they each have less money to lend to you.
It’s easing up though. The lenders are slightly less cautious already and some are offering one off products for short amounts of time to get in good business. Then they close their doors again. I can find these rates for you. )
When the lenders are happier that properties have close to bottomed out they will reduce their rates significantly and start lending again as lending will be far less risky. They also as mentioned earlier need time to see what bad business mortgages they have on their current books to assess their real financial situation.
We should see about another 15% drop in house prices between now and April and next year, hopefully then we’ll see house prices stabilise and start moving up again in value.
As confidence in the property market increases the builders will be back to work along with many other professsions linked to property. The knock on effect will gradually reach all businesses and the frequency of redundancies should begin to fall.
If you’re looking to buy at the moment my advice is to put crazy offers in. You’ve got nothing to lose. You’ll lose money on the rate as they’re pretty high but you will save money on the price. There are some real bargains out there and if you’ve got good income and a good deposit it’s a great time to buy.
If you are looking to sell. Good luck and take what you can while you can. If you have got time to wait and do the place up you could be onto a winner. Builders are feeling the crunch and you should be able to negotiate your price.
If you are looking to go into negative equity act now before you do and get an extension done to improve the value of your home to curb it.
100% borrowing and above is a thing of the past. Try to remain in the green.
I hope this is helpful. If you want to keep receiving updates such as this one please become a fan of Hurleys Mortgage & Financial Solutions please click on http://www.hurleysfinancialsolutions.com and goto enquiry online. From there you can request information and advice or leave your contact details for calls/mailings. I will then be able to keep you up to date with any changes and other information on the mortgage and property market that could be of interest to you, or that you specifically require.
I look forward to hearing from you.
Jason Hurley BSc Hons FPC, CeMAP
[...] Today almost every nation in both the developed and developing worlds is deeply in the territory of negative real interest rates. In other words, savings kept dormant in the bank loses, rather than gains, value. As the long [...]
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