Will Interest Rates Rise in 2011?

Written by Steve Wentworth
Tuesday, 11th January 2011

There seems to be a rumbling in the financial sector and press that the Bank of England monetary policy committee are looking at increasing the bank base rate as soon as feasibly possible. This has sparked a rush by some to remortgage onto a fixed rate deal. Figures from the Bank of England reveal a 42% jump in the number of remortgaging compared with the same month in 2009.

It is with no doubt that the Bank of England will raise the interest rate at some point in the future. The Bank Base Rate BBR can not remain at the historic low of 0.5%. Last month Paul Fisher, the executive director of markets and member of the Monetary Policy Committee (MPC, responsible for setting the BBR) discussed with the Daily Telegraph how members would like to see rates increase to their normalised position, and that he hopes people are aware that rates will rise to this normalised position. The normalised position would be that of Gross Domestic Product (GDP) plus inflation. So with GDP at around 2.25% and target inflation of 2% then an ideal normalised BBR of 4.5 – 5%, ten times more than the current position.

Some articles and reports have misrepresented Mr Fishers comments even the Daily Telegraph who conducted the interview stated 'central bank policy-makers would like rates to increase as much as tenfold from their current historic low of 0.5% as soon as possible'. However reading the actual transcript, Mr Fisher simply agreed to the Daily Telegraphs economics editor Philip Aldricks suggestion of a normalised rate of 5%. Mr Fisher did say that the MPC would need to respond to people's reaction to those changes in rate. 'It's not something where we would put rates up and ignore the reaction to it'. Tightening of the rates would only be made rapidly if the strength in the economy demanded it. The MPC would not be putting up rates so quickly as to cause a negative reaction.

With BBR static at 0.5% for the past 21 months, this has instilled a rate-spoilt ethos into current debtors. With mortgage lenders standard variable rates SVR lower than best buy fixed rate mortgage deals it appears home-owners are refraining from remortgaging to a new fixed rate deal until the bank base rate starts to rise. Currently over a third of home-owners are now on their lenders SVR mortgage with no plans to remortgage. With the following best buy fixed rate mortgages based on average UK house price of £160,000 and 25 year mortgage: -

Remortgage at 60% LTV (mortgage of £96,000)

• 2.59% fixed for 2 years, monthly payments of £435, £525 fees.
• 3.28% fixed for 2 years, monthly payments of £469, £35 fees.
• 2.89% fixed for 3 years, monthly payments of £450, £525 fees
• 4.09% fixed for 3 years, monthly payments of £512, £234 fees.
• 3.89% fixed for 5 years, monthly payments of £501, £524 fees

Remortgage at 80% LTV (mortgage of £128,000)

• 3.49% fixed for 2 years, monthly payments of £640, £301 fees
• 3.99% fixed for 3 years, monthly payments of £675, £25 fees.
• 4.6% fixed for 5 years, monthly payments of £719, £720 fees.

In 2007 the fixed rates reached around 7.8% therefore today best buy fixed rates show a significant saving considering that BBR is likely to rise at some point in the near future. The first time the MPC decide to raise the bank base rate will be the big signal to people that rates are on the rise and its worth noting that fixed rates as good as those listed above will no longer be available, for a very long time if ever.

It is the view of the author that the monetary policy committee will unlikely raise interest rates in the January 2011 meeting on Thursday 13th. This view is based on the fact that the impact of the VAT rise to 20% on the 4th January 2011 is not yet known. However, from reading various articles and comments from people in control of the economy the author does have a strong feeling that a trial rate rise could be made in the February or March meetings, after the impact on VAT can be assessed and prior to the National Insurance rise in April.

What next for interest rates? If only we could predict an exact forecast, but we can't. We can however, arm you with the right information and views from those in the know so you can make your own judgement.

About the author:

Steve Wentworth formed his firm Wentworth Financial Services in November 2007 having been in the industry since November 2002. Find out how much your mortgage could go up by using our free mortgage calculator. If you would like some remortgage advise then complete your details on our site.