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Base rate to be 1% by the Summer?

 Legal & General Investment Management (LGIM) has forecast that the Bank of England will increase base rate to 1% by the summer, hitting nine out of ten mortgage borrowers.

Its research suggests that far more households are now exposed to rate hikes, estimating 90% of all mortgages in the UK are variable rates, up from 60% in 2007, and well beyond the FSA's estimate of 68%.

The investment division of L&G said that the first rate rise will come in May and will likely be followed by another increase by the summer, then remaining on hold throughout 2012.

LGIM warned that consumers will experience "a meaningful impact to their cash flow" if banks choose to pass on the rate rise to borrowers.

Tim Drayson, economist at LGIM (pictured), said the MPC faced an extremely difficult task, with inflation running at double its target, but economic growth going into reverse.He said higher interest rates are needed to calm inflation, but warned that the economy is on a knife edge and could easily tip back into recession if the MPC raises rates too much, too soon. Drayson said: "I can see a couple of rate hikes by summer this year, but nothing beyond that because the economy would not be able to handle it. I wouldn't want to be on the MPC right now, because the risk of a policy error is so high."What is clear is that the growth and inflation trade-off has massively deteriorated in the UK. It will be very difficult to balance and inflation will return to target only slowly."

 

LGIM said that the markets are now expecting four rate hikes over this year and into 2012. However, it said expectations over how far base rate will rise appear "excessive" and it did not believe the MPC "needs to inflict this much pain on the economy".Drayson said that increasing interest rates is likely to slow economic growth more than the government is expecting and cause unemployment to rise to 10%, so putting a halt to further rate rises.

 

LGIM noted that the current difference in opinion among Committee members, with a four-way split at the last meeting, is extremely rare.

A key player within the Monetary Policy Committee could be moderate Charlie Bean. Drayson said that if Bean votes for an increase in interest rates, he could well take other committee members with him.

 

Posted: 10/03/2011 10:23:57 by Mark Williams | with 0 comments
Filed under: base, fixed, increase, rate, summer, variable


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