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Prepare for interest rates of 5%, warns BoE markets chief

Homeowners should prepare for interest rates of around 5 per cent, Bank of England executive director of markets Paul Fisher has warned.

In an interview with the Daily Telegraph, Fisher, who is also a member of the rate setting Monetary Policy Committee, says that central bank policymakers would like to raise rates as much as tenfold from the historic low as soon as possible.

Earlier this month the Bank of England held base rates at 0.5 per cent for the 21st month in a row. The latest minutes showed a three way split on how to deal with elevated inflation, with a rise in rates and additional quantitative easing both touted.

Fisher says: “We hope people are aware that interest rates at some point will go up again and that they will head back to a normalised position,

“What we need to do is to trigger the mindset in people that that’s where rates will eventually go back to.”

Fisher’s comments come after a Bank research paper found that more than seven million people are at risk of rate rises. Two thirds of mortgage borrowers are currently on variable rates, compared with half in a normal year. It also found that if rates were held at 5 per cent on current wages, households would be spending more of their disposable income on debt interest than at any time in the past 20 years.

Fisher says there is no set timetable for the rate rises as any decision “will be conditioned on economic growth and prospects”.

He says: “We would put rates up, see what the effect is and then judge how quickly to go,” he said. “I don’t think a change of 25 or even 50 basis points is going to trigger a recession.

“Obviously the first time we raise base rates that will be a big signal to people. But you’d like to think independent financial advisers and others will be bringing this home to people when they are arranging their mortgages and other borrowings.

“We have to bear in mind savers have being doing particularly badly while borrowers have been benefiting. We can’t favour one group over another.”

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Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. 5% is close to the long term norm. But relaistically I don’t think we are going to see it for some time…

    UK PLC is trying to export its way out of recession supported by a weak pound caused by low interest rates & there are signs this is working. Higher rates lead to a stronger pound and weaker exports which will be followed by economic collapse…

    Domestically we have talked about cuts but their full impact has yet to be felt. There is also a rise in in VAT in the pipe. So I would be surprised if base rate got above 1% in 2011.

    All that said in 5 years time 5% is very likely so the average borrower needs to make sure that when this happens, and happen it will, they have enough spare cash to pay their mortgages…

  2. Do this and prepare for the economy to collapse. This man mentioned IFAs having to educate consumers. We can’t make a quart out of a pint pot. People are struggling. Lots are about to lost their jobs.

    Inflation is not being driven by consumer spending.

    There is some sort of puritanical streak that runs through some of these comments – as though these highly paid job guaranteed for life big pension people *want* the average consumer to suffer for past profligacy.

    I’m going off on a tangent here, but it reminds of of the novel, 1984. Winston is in love with Julia. The state try to break this love but only manage when Winston is confronted by his ultimate fear. At this point he screams “do it to her” and it is all over.

    If this is too oblique – Winston is the regulator and Bank of England, and Julia is the banks.

  3. the main thing to remember is that borrowers have not been benifiting at a rate of 0.5% on variable rates as lenders are charging between 3.5 & 5.5 on their variable rates the real question will be will lenders still want this level of margin in their lending if they do it could mean rates of 6.5-9% and if this happens in the near future the housing market is going through the floor

  4. Keep a keen eye on those fixed rate deals for me – especially the 3 year variants.

    May be prudent to jump straight into one in March !

  5. If you have a life time tracker at between 0.17% and 0.50% over base for the whole mortgage term jumping to a 5 year fixed rate at 3.75% plus makes very little sense. The premise that rates will return to 5% in the short-term is arrant crap and I suspect the gentlemen at the Bank know it.
    This is a re-visiting of the old Ken Clarkw ploy of threatening to put up rates to keep everyone sensible without actually having to do it with the ensuing damage.

  6. I think IFAs have right judging by the responses above.

  7. Its all right for those at the top with plenty of money threatening the ordinary person with incresed mortgage rates. Where the h..ll do these people live, is it the real world or some other planet.

    Petrols up, VAT up, electricity up, gas up, Council tax up(from april anyway).Cost of food up. The general public are not bottomless pits.
    Get a life

  8. If this kind of story stops the public from over spending I can’t see that it’s a bad thing. I would sooner the bank of England spread a story thats curbs over spending and that they don’t have any “ensuing damage” to deal with.

  9. At the moment is all an awful mess… You have some folks with Mortgage rates 10 times those of others… (0.5 vs 5%)

    ……Advertising on the television showing APR rates of over 2000% for short term loans… My savings account pays 0.01%, yet if I go into overdraft I can expect to see charges of 30%…

    TCF it’s a bloody joke….

    The poor grey brigade (of which I am nearly one) are seeing their savings being eaten up, so they are then forced into more volatile investments – okay whilst yer FTSE climbs to 6000, but when it does fall, it just going to be bloody miserable for all…

    No investment tax therefore for HMG.

    Falling returns for the investor …….

    ……but with bank bonuses maintained/payable… .. no wonder joe public despises the Financial Sector….

    A return to rates a la 5% could at least give a fairer playing field…

    .. then folks might see sense in saving (rather than investing) and the current paving/savings campaign might (start to) make a little sense…

    Hey Ho — Happy Christmas….

  10. For “trigger the mindset” read panic!

  11. It’s obvious they need to get themselves out of ANOTHER hole,they have used up the QE on bonuses etc.

  12. I mean this as a polite request…..I’d b grateful if Mr Fisher could provide a logical explanation of why he believes raising interest rates is requied at this point or at ny point in the near future? The reason I ask this is because, although the base rate is 0.5%, there aren’t many members of the general public benefitting from this. As we all know, if you try to borrow for a mortgage now, you still pay around 5% p.a. (in this case Mr Fisher’s comments might mean the banks will ask for greter deposits as Mr Fisher seems to want to push us towards a major house-price crash). Car finance is still at 11% plus and credit cards are still charging around 20%. So, from what I can see, no-one except the lenders and the government (in terms of interest on debt) are benefitting from the low rates and I’m sure that it is in policy-makers interests to ensure that these two benefit so why the rush to change? I don’t buy the inflation argument at all. The current rise in inflation isn’t anything to do with consumer spending. Yes, you can put interests up, but is this really going to make BP or Shell take 10 pence off a litre of petrol? From my point of view, we seem to have fallen into a present situation that absolutely suits the governments and the ruling classes/elite. The base rate is extremely low but lenders lend at the previous rates and make a fantastic margin – banks and the bankers get richer. The low rates keep the government’s cost of debt lower (if we’re not bankrupt by the next election maybe they’ll get in again) and the pound is so weak it might assist in boosting the economy. Surely this is all economic heaven for the rich and ruling classes – why would they want to do anything to change this Mr Fisher? Honestly, I would really like to hear your explanation.

  13. I pay 4.79% and do not have enough equity to remortgage – 4.79% plus BOE 5% = 9.79% on 400k = BANKRUPTCY! – all because gov and fsa let banks pratice fractional lending in some cases 40 times what their deposit book value was ; on top of packaging debt on to others x 100? – JO PUBLIC pay a heavy price while banks and gov enjoy 0.5% BOE base rate –

  14. Sooner or later the BoE base rate has to be raised. It simply cannot stay indefinitely at just ½% p.a. The questions are how soon it will be raised and by how much lending rates will remain above that rate as lenders continue to repair their battered balance sheets. The odd thing, though, is that lenders who didn’t allow themselves to become embroiled in the frenzy of reckless lending seem to be charging rates similar to those who did, so something obviously isn’t working as it should and the FSA still seems powerless to impose any sort of fairness and order on the market.

    Here in the West Country, house prices still seem to be alarmingly high and it’s frightening to think that I for one couldn’t possibly afford now to buy the house I did in 1982 for £24,500 when I was just 25 years old and on a decidedly modest salary of £6,500 p.a. (with the aid of a recent inheritance, I had a big deposit) A return to “normality” would mean house prices falling by 30 or 40% and we’re a long way from that. Whether or not that will come to pass is, I suggest, a much bigger (and more troubling) question than whether or not the BoE base rate is likely to go up to 5% p.a. over the coming few years.

  15. If the Bank of England want to increase the base rate to 5% that is fine, but they must cap the lending rates of the banks to say 1% to 3% maximum above the base rate for existing lenders including those on variable rates to protect the mortgage and the property market.

    Yes I know you might say race out and lock into a fixed rate but its not that easy anymore as the banks wont refinance for many borrowers.

    Another solution re-introduce MIRAS, say up to £100,000 qualifying for tax relief of say 50% on the interest charged, and phase out the MIRAS from £100,000 to Nil over 5 Years, this would give first time buyers a chance to buy, existing borrower (tax payers that bailed out the banks), a chance to benefit from borrowing at lower interest rates! The MIRAS benefit should be repaid directly to the loan and cannot be taken as cash!

    This way if you are a tax payer and have a mortgage on your home, not holiday home or second home, you get a tax break!

    This way increasing bank interest rates wont hurt mortgage borrowers as much!

    Paul Jakarta

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