06/07/07 - Interest Rates Hit new High

The Bank of England has voted to raise interest rates to 5.75%...

The Committee judged that, relative to the 2% target, the balance of risks to the outlook for inflation in the medium term continued to lie to the upside. Against that background, it further judged that an increase in Bank Rate of 0.25 percentage points to 5.75% was necessary to meet the 2% target for CPI inflation in the medium term.

The British Chambers of Commerce lambasted the BoE for potentially damaging the economy:

"It should allow more time for previous interest rate increases to have their effect, before rushing to raise interest rates further, thus inflicting lasting damage on the economy," said the BCC's economic adviser David Kern.

Output growth has remained firm and appears to be evolving in line with the Committee’s most recent projections. Credit and broad money continue to grow rapidly. The pace of expansion of the world economy remains robust.

Steve Radley, chief economist at the EEF manufacturers' organization, accused the BoE of going to far: "We believe that today's increase is a step too far and risks slowing the economy unnecessarily".

MPC ‘ignored vital warning signs’

David Bexon, Managing Director of SmartNewHomes.com, went even further than Steve Radley’s criticism, calling the rise ‘exorbitant’

“I am appalled by today’s decision to further increase interest rates. Has the Governor forgotten that the ordinary home owning public is already stretched to capacity and will struggle to pay these escalating mortgage payments? With lenders no-longer offering attractive fixed rate deals and charging exorbitant fees, borrowers looking to re-mortgage will be hit twice.

“While we experienced a positive price growth across the market last month, consumers are becoming increasingly cautious - this latest rise could seriously damage the market as buyer confidence falls to an all time low.

“First time buyers are staying away in droves and even buy-to-let investors are being more cautious. The MPC has ignored vital warning signs, failing to recognise that the market can simply not sustain another rate rise at this time.”



Severe danger of ‘debt crisis’

Robert Bryant-Pearson, Chief Executive of Allied Surveyors observed:

“This upward spiral of rate rises must stop or 2007 will see more rate rises than has been experienced in any other year over the last decade.

“Borrowers who took on a mortgage in the years leading up to 2006, roughly calculating their affordability on a 5% ceiling are now stretched to capacity and are in severe danger of a debt crisis. Current deals are far from competitive, leaving those coming to the end of a fixed rate term particularly vulnerable.

“With the threat of repossessions now paramount in the market and buyer confidence falling to an all time low, I urge the MPC to think very carefully ahead of next month’s decision to ensure stability in the market.”

Rate rises ‘penalise everybody’

Stephen Kenny, chief executive of ThePropertyInvestmentMarket.com was worried about the effect on household expenditure:

“The Bank of England’s decision to increase rates for the fifth time will push up household bills as incomes remain static. Recent figures have shown that house price growth is already easing, as a result of the previous four interest rate rises.

“However, the current demand for property will mean that house price growth is set to continue, although at a slower pace. If, however, Gordon Brown really does address the problem of supply, the rate of house price growth is likely to be curbed. It would have a much greater impact than any interest rate increase, which penalise everybody.

“So far buy-to-let investors are riding the storm. Demand for rented accommodation remains high as more potential buyers are opting out of the housing market, as a result of affordability constraints and rising immigration is also providing tenants. However, as the cost of owning a property rises, investors should pay attention to regional price differences and do their research to help maximise profit in the long-term.”

FTBs the ‘biggest losers’

Stuart Law, Managing Director of Assetz believes the rise was unnecessary:

“Although the latest rise was widely predicted by economists, many of us believed it was entirely unnecessary in light of recent inflation figures.

“Once again, the Bank has applied more pressure on borrowers in its own attempt to communicate a firm control before the quarterly Inflation Report in August, despite inflation having already shown signs of a significant slowdown in recent months. Mervyn King himself has acknowledged that a sharp fall is likely before the end of the year, and Assetz analysis suggests inflation will drop back to 2% as early as September.

“Demand is such in this country that growth in the housing market will continue to be robust in spite of the latest rise, and will continue at 7-10% for the year. A further raise however would perhaps be one too far, and could begin to slow growth in the residential market.

“First-time buyers are the biggest losers again, continually priced out of the market and forced to rent for longer periods. While an increasing rental demand favours buy-to-let investors, the rising costs are now persuading them to look away from residential lets for higher yielding properties in the commercial and holiday sectors.”