Which Way Next For The Base Rate?
Two-year fixed rate have hit an eight year high for those with a 5% deposit. Even with a 25% deposit interest rates are over 6%. The MPC is likely to be torn as to which direction to move the base rate - if at all. With so many factors outside of their control, they are always left reacting to situations.
Two-year fixed rate mortgages are at their most expensive since February 2000, despite the Bank of England base rate being a full percentage point less now than it was then.
The average interest rate on two-year mortgages is now 6.94% for a 95% mortgage, as homebuyers struggle to come up with the finances to buy new homes. It has not been this high for over eight years.
This week the Bank’s Monetary Policy Committee will sit down to decide the level of the base rate for the next month, and the members are likely to be pulled in three different ways. Some will be drawn to pull the rate down as the housing market, retailers and industry would receive a boost. Other will be pushing for a rate rise as they strive to curb inflation, which hit 3% in April, and is likely to go higher. Other members of the MPC will consider that the middle ground of no change will be the best course for now.
Economists who at the turn of year were forecasting further rate cuts throughout 2008 are likely to be left disappointed, as, even if the MPC votes for a rate cut this week, it would almost certainly be the last one this year in the current economic circumstances.
It really serves only to demonstrate that they have to react to economic situations, rather than create them. They did not foresee the credit crunch last year, and they did not foresee the upward pressure on food, fuel and energy this year, but have had to react to both.
It all leaves the poor homeowner and would-be first-time buyer in a very awkward situation. For those will no deposit there is no entry to the market; as we have seen above, those with a 5% deposit can enter the market, but expensively; even for those with a 25% deposit, interest rates are now above 6%.
House prices are falling and will eventually entice first-time buyers into the market, but it seems a long way off at the moment.
