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Mortgage borrower pain predicted after inflation hike

Experts have warned that mortgage borrowers may be set for painful repayment hikes after record inflation figures were revealed this week.

The Office of National Statistics revealed that inflation increased by a record 1 per cent between November and December 2009, from 1.9 per cent to 2.9 per cent.

The ONS attributed the hike to low energy prices at the end of 2008, but the New Year VAT increase from 15 per cent to 17.5 per cent may have also helped raise figures and may continue to push up inflation above 3 per cent next month, according to Schroders European economist Azad Zangana.

While Zangana says that the Monetary Policy Committee will be at pains to raise interest rates too quickly, others warn this may lead to interest rate hikes to contain inflation.

Coreco director Andrew Montlake says: “More people than ever are on variable rate mortgages at present, either because they cannot remortgage or because they have decided not to given the discount on variable rates relative to fixed.

“If rates rise then these borrowers will find themselves with significantly higher monthly payments.”

Emba Group sales and marketing director Mike Fitzgerald says: “The low-rate party is nearly over and there is a strong expectation that rates will have to rise to make sure inflation stays dead, because inflation in a recession is really bad.

“The underlying trend will be one rising rates, it has to because we can’t stay this low forever.”

F&C analyst Ted Scott says: “Even a modest rise in rates could increase mortgage repayments considerably and make a meaningful economic recovery more difficult. It will also raise the cost of capital for the corporate sector but unlike some previous cycles companies are in reasonable financial shape.

“For the economy, the earlier tightening of monetary policy is not good news. Ultimately monetary policy will be predicated on how the economy performs so if we have a double dip recession or growth is very subdued any rise in rates will be very gradual.”

Caxton FX senior analyst Duncan Higgins says this morning’s CPI data saw Sterling jump, meaning interest rates may need to be raised sooner than expected in order to curb the upward trend.

He says: “While the economy has been in recession the Bank has kept its focus on returning the economy to growth, and deflationary pressures were the greater concern. Inflation now appears to be accelerating, which will support the need for the Bank to start tightening policy sooner than anticipated.”

Liberal Democrat Shadow Chancellor Vince Cable has allayed fears of any interest rate rises, branding today’s inflation figures a “spike”.

He says:
“With inflation expected to fall quickly, it seems unlikely that the Bank of England would want to raise interest rates in the near future.

“Any recovery in the economy is still very fragile, it would be all too easy to destroy it by putting the brakes on too soon. However, the MPC still needs to be acutely aware of the longer term inflationary dangers.”

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. And of course the recommendation is to fix now before it’s too late. Real inflation is not on the rise, what shows is the relationship between CPI prices last year and this which are affected by a number of factors the MPC are all to aware of such as the increase in VAT. Learn something about basic economics before spreading scare stories.

  2. Is inflation not also caused by over spending and what happens annually November/December time just before Christmas or is that too simple an economic analysis of how inflation has increased recently.

  3. The author of this article ought to familiarise himself/herself with the BofEs last inflation report. This spike was predicted and expected becuase of VAT and energy prices, however inflation is expected to fall back again.
    As a mortgage adviser I am in no rush to panic my clients in the way this article does.
    Knowing about this spike the BofE consensus was rate rises towards the end of the year.

  4. You must be joking 19th January 2010 at 5:03 pm

    In my own humble opinion (and having studied economics) there will be enough tightening of fiscal policy after this year’s general election – assuming the first budget is a sensible one – to remove the need for any early rises in interest rates.

    That’s not to say it won’t happen, as the BoE have managed to make a mess of things in the past, but hopefully this time there will be greater thought before any decisions are reached.

    Unfortunately I agree with the first Aninymous – seems a lot like mortgage brokers trying to drum up business with scare tactics!

  5. I agree with the ist 3 replies and think the author of the piece should go and work for a tabloid. Ted Scott articulates the facts very well.

  6. Experts, “yeah whatever”
    The fiscal policy point is spot on. We will see huge public sector lay offs this year, adding to the nearly 3m unemployed. This in itself is deflationary as it will drive down labour costs. Add to that the huge tax increases we will see in 2010 and 2011 and you will most certainly see consumer spending come under pressure, again driving down consumption and prices. Where on earth do you get these people from?

  7. I’m seeing supplier price hikes on a daily basis at the moment – most of my suppliers are in Asia.

    India is expected to be in double digit inflation by March. The Chinese government has just moved to head off inflation because of the many warning signs.

    Time for the BoE to act – and quickly. Or are they asleep at the wheel?

  8. Alistair E Niven 19th January 2010 at 7:55 pm

    The writer Lee Jones became a features writer at Money Marketing in September 2009. Before that he covered mortgages and economics for the newspaper from August 2008. He was formerly a mortgage reporter at Mortgage Strategy magazine before taking time out to teach English in Eastern Hungary.
    With that info one can more approprately weigh the value of the article.
    I see no reason to lift interest rates yet awhile.

  9. Experts, “yeah whatever”
    The fiscal policy point is spot on. We will see huge public sector lay offs this year, adding to the nearly 3m unemployed. This in itself is deflationary as it will drive down labour costs. Add to that the huge tax increases we will see in 2010 and 2011 and you will most certainly see consumer spending come under pressure, again driving down consumption and prices. Where on earth do you get these people from?

  10. There seems to be an awful lot of waffle of fiscal this I studied this that and the other! The bottom line is simplicity and none of the so called economists predicted the problems now but lets face it was more about lets turn a blind eye. Lets get back to basics here its not about mortgage brokers scaring anybody the facts are its the lowest interest rate ever tending to be only one way and thats up… Its seems that if mortgage brokers are scaring them then IFA’s are gambling on them. My point is a mortgage broker Fixed rate or Tracker still gets paid and right now I feel it can only mean a fix rate mortgage if your clients preferences and needs deem so. If you advise a tracker and we have a huge rise I do hope the gambling man sleeps at night.

  11. QE will have to stop first, it will take at least a quarter to see if it has had an impact, and only then can rates be assessed. You cant raise rates if QE is running it makes so sense. Its a shame mostly business owners come on here, and the not the customers of such people… tho if they did you would lose their custom in all liklihood

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