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We need a rate rise

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March saw mortgage applications climb for the third consecutive month and a growing number of borrowers opting for fixed-rate products.

We can all draw strength from the upward trend in applications but I doubt any of the politicians will spend much time worrying about the rise in inflation reported by the Office for National Statistics. The consumer price index climbed 0.6 per cent in the month and is now 3.4 per cent higher than a year ago, according to the latest figures from the ONS. City economists had expected inflation to come in at 3.1 per cent.

When I mentioned to a colleague that inflation had risen, it came as no surprise to her. Her reaction was along the lines of: “Inflation in single digits? Some selective spinning and inventive arithmetic here. Over the last three years, fuel bills have trebled, my car insurance went up 20 per cent from last year, the price of food has rocketed and they try to fool me that inflation is just a few per cent. What did they expect when they devalued the currency by 30 per cent and compounded the felony by printing funny money? History teaches us that inflation, once created, is very destructive and very expensive to get under control.”

In the grand scheme of things, with the country facing a serious economic crisis you might be tempted, depending on which side of the political fence you stand, either to paint inflation as a sign of recovery or as representing further pressure on household finances. Both of those have elements of truth but I would like to see interest rates rise to help kick-start the mortgage market. However, the earliest we can realistically expect this to happen is the fourth quarter of this year, although I suspect we will be waiting until well into next year.

So I am not suggesting this is going to happen imminently but increasing interest rates is a widely accepted way to manage inflation as well as being of benefit to the mortgage market.

On a lighter inflationary note, the value of 10 Downing Street has plunged while Gordon Brown has been in residence, new figures suggest. The property is valued at £4.5m, a drop of 9.18 per cent or £460,000, according to property website Zoopla. It is in sharp contrast to Tony Blair who saw the property’s price climb from £1.65m when he took office in 1997 to more than £5m when he handed over the keys to Mr Brown.

Sally Laker is managing director of Mortgage Intelligence and Mortgage Next

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. I don’t know which school of economics you subscribe to, but an increase in base rate in the short term will have a profoundly negative effect on houseold budgets and mortgage affordability. As a heavily indebted society, we need to change our entire belief system when it comes to wealth creation and preservation. A move away from ‘the never-never’ debt system.

    The UK governement can no longer mortgage our future, UK Gilts will likely be yielding double digits within 6 months as the European crisis spreads fruther afield (to both banks and sovereignties), and yes in all liklihood base rates will creep up to 3-4% by end of 2011.

    Be very careful what you wish for. A rate rise will benefit the wealthy, predominantly baby-boomers, but will extinguish any hope of serious wealth creation or home ownership for the majority of Generation X & Y.

    Unless the UK can build a sustainable manufacturing base, we are doomed to relying on the bloated retail and service economy that exists in the UK.

    I for one am a Generation X’er and see no future for my generation in this country. Those who work hard are not rewarded, and we’ll be taxed to our bare bones as with the rest of those who actually contribute something to the economy.

    So what next, shall I opt for an easy life on benefits, or get on the next plane out of here (assuming no tectonic inconveniences).

    Base rate variances really pale into insignificance. We need to look at the broader fiscal and demographic time bomb issues facing UK Plc.

  2. Leon Jone-Mackay 30th April 2010 at 3:38 pm

    I agree to some extent but gilts bonds hedges etc have no effect on the majority of consumers minds when it comes to the mortgage market. I think Sally is refering to a base rate climb as a kick up the back side for some people coasting on SVR’s who think that sitting still and the BBR will last for ever. When people talk of a double dip what nonsense this is just the start of the real recession, people will know what recession is when the mortgage goes up and repossession is at a high. So Agree totally with you David from an economics point of view but from a realist perspective I agree with Sally.

  3. In the last reported figures, the largest component of inflation was the rise in petrol prices.

    How in the name of anything raising interest rates will help the mortgage market I don’t know.

    Morgages become more expensive, household disposable income drops even further, the upstream market also grinds to a halt.

    Faulty thinking I am afraid.

  4. Surely the best way to get the housing market moving again would be tying mortgage lending to a capped multiple of income by law, forcing prices to fall into line with earnings and allowing people the chance to purchase without almost unobtainable deposits.

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