Shelter’s Income and expenditure figures highlighted13:57 PM, 4th February 2019
About 2 weeks ago 35
What most Landlords are interested in, because many have Buy to Let mortgages, from my Bank of England quarterly inflation report summaries is what might happen to interest rates in the future.
Well the good news if you are hoping the rate stays low is that the latest report shows the lowest predicted medium term rates on record. Please see the graphic depiction of this below indicating a more gradual increase in UK and international interest rates:
The Governor of the Bank of England, Mark Carney, has even reversed the statement that the Base rate could not fall below 0.5%. This is because since the credit crunch Banks have recapitalised enough to withstand a reduction in their margins if the rate fell to 0.25%.
The reason why bank margins would fall is that loan rates such as trackers would decrease, but the rates they have to pay to savers are “sticky” as you can’t attract funds without paying something.
Long term interest rates have continued to fall since late 2013 with the “ten year spot rate” (the cost of government borrowing) having fallen 0.75% to 1.5%.
This is on the back of UK inflation falling to 0.5% which is 1.5% below the medium term target inflation figure of 2%. This triggered an open letter to the Chancellor setting out the factors weighing on the CPI inflation rate. The biggest factor was the reduction in oil, energy and food prices with 70% of prices in the CPI inflation basket not reducing. Hence if you take out oil, energy and food then the underlying inflation rate is 1.1%.
Therefore we are not in a period of deflation, as some have reported, because for this to happen all or most prices would have to be falling not a minority as at the moment.
It is considered that a short period of low inflation could boost the economy with real wages rising causing an increase in consumption.
The good news for low interest rates is that the above predictions shown in the chart for rate rises have historically (since 2008) erred on the side of caution and always predicted future rates to be higher than has turned out to be the case.
This is largely because the assumptions for growth do not take into account political influences (of which there are many such as Greece, Russia, Oil price recovery etc.) that are likely to dampen the economy.
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