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Rates can fall as well as rise

Like many commentators, following the Chancellor&#39s pre-Budget statement, Lorna Bourke has immediately concluded that interest rates will now certainly rise. She helpfully suggests that clients should switch to a fixed or capped-rate mortgage as soon as possible, apparently even if it means suffering a penalty.

Secondly, clients should defer their retirement or manage without income for two or three years while annuity rates rise.

Of course, this “thoughtful” conclusion that she has “studiously” come to may prove correc, but will probably turn out to be poor advice.

Is she not aware that globally, deflation is an increasing challenge? Once UK consumers stop spending money they don&#39t have on consumables they don&#39t need, then we may see the UK economy slipping into recession or worse.

A rapid rise in unemployment and an equally rapid fall in house prices would follow as the bubble bursts.

Close on its heels would be a debt crisis and, if these events should occur, then the Bank of England&#39s monetary policy committee will be reducing interest rates, not increasing them. Deflation will force long-term gilt yields down and take annuity rates with them.

Unfortunately, unlike financial journalists, I cannot make these soundbitelike decisions and simply move on to the next headline. I need to live and breathe the consequences of advice I offer to clients. It requires a much more comprehensive understanding of how the UK economy works and the wider global influences that apply.

She suggests that if anyone doubts that interest rates will rise, they should look at what happened to gilt prices on the day after the Chancellor&#39s statement. Why? The gilt market had already priced in an increased public sector borrowing requirement.

Well, as instructed I have had a look (a daily event in any case) and noted that, to date, (December 6) the Government Securities Index is higher than the price on November 28.

Roger Harris

Roger Harris & Company,



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