Any possibility of base rates increasing to high levels

mattcook1978

Hi everybody,

Pardon my ignorance, but does anybody out there know if there could be any chance the base rate will go up significantly in coming months/years? I realise it's fairly hard to predict with accuracy, but I wondered if anybody had opinions.

Articles I've read have said that interest rates would be going down to help with the "credit crunch", but that they are unable to do so due to the instability in the financial markets.

If that's the case, would further instability lead to increased base rates, and if so is there any chance it could go up to 10-12% which my parents had to deal with 20 odd years ago?

If so - or if not - why? What are the main differences between now and then?

Thanks in advance to any respondees.

Matt

mizzbiz

Well, they're trying to keep interest rates low to prevent businesses going bust and people losing their homes (i.e. higher interest on loans = unaffordablility and lack of stability).

However, due to the increase in inflation, there may well be rises in the coming months. Raising the interest rate helps to counteract the negative effects of inflation.

There is also the question of greater risk to lenders, so although this may not be fully realised in the base rate, lenders may increase the rates (as happened temporarily recently).
This is for twofold reasons,
1, that the interbank lending rate is rising making it more expensive for banks to borrow money from other financial institutions to lend to borrowers.
2. If, for example, the repossession rate rises, lenders may bump up the interest rate on variables to try and recover some of that loss.

I'm by no means an economist, particularly not a psychic one, but this is the general gist of the current climate.

In my humble and unqualified opinion interest rates will go up, however it would take an awful long time for them to reach that 15% peak that they did in the early nineties. Don't forget, the average interest rate over time has been around 8%, so really, current values are very much below average. Even if they reach 8% (which would take at least a year but almost definitely longer due to paragraph one) we would still be around the long term average.

As a note of interest, on the property prices programme the other day (can't remember the name at this mo sorry) there was a little old lady that had bought her house back in the thirties for about £150. At the time, I thing she said interest rates were about 25%, which is more in the region of credit cards. This puts things in perspective!

Premier_2

mattcook1978 wrote:

If so - or if not - why? What are the main differences between now and then?

One of the main differences is that inflation is currently 4.7% and is expected to reach 5%. Whilst this is well above the current government's self declared target of 2% (so could drive interest rates up), inflation in the late 80s/early 90's was over 10%.

At that time, interest rates were set by government, not independantly by BoE as today, whose responsibility today is to set interest rates accordingly to maintain the government set inflation target. At that time. Maggie and her mates were more interested in setting interest rates in an attempt to try and buck the market (perhaps the initial signs of dementia bearing in mind what she is known for saying about attempting to buck the market!) by keeping sterling within the ERM.

Another thing to note is that inflation in the late 80's/early 90's was being forced up by the price of 'luxury' items such as furniture, white goods, cars, etc. Today inflation is going up because of international increases in the price of necessities such as fuel & food.