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Property loans to increase in cost again

15 December 2004

New data out today could see mortgage rates rise property owners without a capped or fixed rate mortgage.

When the Bank of England decided to hold the base rate of borrowing in the UK at 4.75 per cent earlier this month many market observers predicted that this would be the peak of the current interest rate cycle and the next change to interest rates would be a reduction.

However, today it was announce that inflation, the economic indicator that the Bank of England tries to control by raising and lowering the cost of borrowing in the UK, has risen above expectations.

This has led many people to predict that interest rates, and so the majority of mortgage rates, might rise again in the near future.

Since November 2003 the Bank of England has increased interest rates five times to a three-year high. This has added £1,000 to the annual cost of a £100,000 non-fixed mortgage this year alone, mortgage broker Charcol estimated.

But following the fourth interest rate freeze in a row, Ray Boulger of Charcol,amongst others, predicted rates would stand still or begin to fall.

"There is little remaining doubt that [Bank of England] base rate has now peaked," he commented.

He pointed to falling inflation, the weak dollar and poor retail sales all as "increasing the likelihood of a base rate cut earlier than is generally expected".

But new data out today would seem to contradict this assesment.

Inflation, measured by the consumer price index (CPI) rose by 0.3 per cent in November.

Graeme Leach, chief economist at the Institute of Directors said that these figures are in line with another 0.25 per cent hike in interest rates early next year.

But he did not believe that interest rate rises on the scale of the first half of 2004 would be repeated.

"The headline figure looked bad at first sight, but closer examination provides reassurance that inflation remains under control,” he said.

Of the 0.3 per cent month on month rise, 0.1per cent was accounted for by higher fuel prices and so is likely to be reversed after recent fallback in oil prices. Another 0.1 per cent was explained by gas and electricity prices, but there was little or no evidence of any inflationary pressure in the High Street, the Institute of Directors explained.