Prospects for Interest Rates in 2009

Today, I receive a nice surprise from my mortgage lender, Standard Life. Standard Life had reduced there APR by the full 0.5% that the MPC cut base rates. This meant by 47 year interest only mortgage was reduced from £627 to £571. It’s a significant saving, and if interest rates fall by another 1%, my mortgage will be getting close to £400. (By the way, the market rent for my house in Oxford would be over £800).

Anyway, the economic outlook is pretty grim at the moment.
Confidence amongst manufactures has fallen to -60
Unemployment is rising sharply.
Gordon Brown and Mervyn King have both admitted the economy is entering a full blown recession.
Housing market continues to freeze up, causing few house sales and falling house prices.
Banks still reluctant to lend despite injection of cash into the banking system by government.

Although inflation is still way above target, the collapse in oil prices means inflation will definitely be coming down next year. With inflation forecast to come down, the Bank of England may feel free to aggressively cut rates to try and avoid a lengthy recession.
In addition to a loosening of monetary policy, the government is also proposing higher spending to boost Aggregate demand through expansionary fiscal policy. (despite the increase in government borrowing and National Debt)

I think interest rates of 3% are a possibility for the end of 2009. It depends how deep the recession becomes and whether the economy responds to the lower rates and higher spending.

2009 will not be a good year for people living off savings, but, it will be a good year for people like me with large debts. If interest rates do fall to 3% buying a house will become very attractive - as long as people can actually get a mortgages.