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Another Interest Rate Prediction
RenovationMan
Posts: 4,227 Forumite
I'm sorry if this has already been posted:
http://www.icl-ifa.co.uk/2010/07/interest-rate-prediction/
"The publication of the latest GDP figures last week suggested that the UK economy was recovering at a healthier than expected rate. This resulted in suggestions that interest rates might need to go up sooner than previously thought, to prevent the economy overheating."
The well respected Ernst & Young Item Club has entered the debate with a prediction that the Bank Rate will need to remain at 0.5% until at least 2014. This prediction follows one from the newly formed Office for Budget Responsibility (OBR), who believe interest rates will need to start going up again next year.
The Item Club have based their prediction on the scale of planned government cuts which are likely to hold back economic growth over the medium term. At the same time, they say that inflation will remain above the government target of 2% for CPI for the next 18 months, with high energy prices and the VAT increase supporting this.
So, assuming that the 0.5% Bank Rate remains in place for another three years or more, what does this mean for your Financial Planning?
It suggests that the return from cash, particularly in real terms after inflation, is going to be dismal. Some good deals can be had from fixed term cash deposits, but savers are going to need to erode their capital or take greater investment risk to deliver the income levels they were used to only a couple of years ago.
Low interest rates will mean lower expenditure on debts, including mortgage repayments. The next few years will be a great time to reduce outstanding loans.
Another consequence of low interest rates is that the return from other investment asset classes is likely to be more modest. This could result in investors adopting a more global approach to investing their money, as other economies recover at a more exciting pace and create opportunities for greater returns."
This pretty much gels with what I said on a thread last week, that the BoE will allow rates to remain over target over the next few months because they know that the government cuts and tax hikes will hold back growth.
Of particular interest to me was the section I have highlighted in blue which discusses personal financial planning. It seems that my decision to buy a really expensive home and ramp up my mortgage debt was the right choice instead of what I was originally doing which was to have a very low mortgage and extensive savings.
A stagnant housing market with flat house prices coupled with low interest rates is the perfect time to jump up the housing ladder and then make overpayments to increase equity while house values are maintained. With discipline and hard work, by the time interets rates start getting back to normal (BoE 5%), I'll have paid down my mortgage to a 'normal' level and yet be living in a property I could never have dreamed of owning just a few years ago.
http://www.icl-ifa.co.uk/2010/07/interest-rate-prediction/
"The publication of the latest GDP figures last week suggested that the UK economy was recovering at a healthier than expected rate. This resulted in suggestions that interest rates might need to go up sooner than previously thought, to prevent the economy overheating."
The well respected Ernst & Young Item Club has entered the debate with a prediction that the Bank Rate will need to remain at 0.5% until at least 2014. This prediction follows one from the newly formed Office for Budget Responsibility (OBR), who believe interest rates will need to start going up again next year.
The Item Club have based their prediction on the scale of planned government cuts which are likely to hold back economic growth over the medium term. At the same time, they say that inflation will remain above the government target of 2% for CPI for the next 18 months, with high energy prices and the VAT increase supporting this.
So, assuming that the 0.5% Bank Rate remains in place for another three years or more, what does this mean for your Financial Planning?
It suggests that the return from cash, particularly in real terms after inflation, is going to be dismal. Some good deals can be had from fixed term cash deposits, but savers are going to need to erode their capital or take greater investment risk to deliver the income levels they were used to only a couple of years ago.
Low interest rates will mean lower expenditure on debts, including mortgage repayments. The next few years will be a great time to reduce outstanding loans.
Another consequence of low interest rates is that the return from other investment asset classes is likely to be more modest. This could result in investors adopting a more global approach to investing their money, as other economies recover at a more exciting pace and create opportunities for greater returns."
This pretty much gels with what I said on a thread last week, that the BoE will allow rates to remain over target over the next few months because they know that the government cuts and tax hikes will hold back growth.
Of particular interest to me was the section I have highlighted in blue which discusses personal financial planning. It seems that my decision to buy a really expensive home and ramp up my mortgage debt was the right choice instead of what I was originally doing which was to have a very low mortgage and extensive savings.
A stagnant housing market with flat house prices coupled with low interest rates is the perfect time to jump up the housing ladder and then make overpayments to increase equity while house values are maintained. With discipline and hard work, by the time interets rates start getting back to normal (BoE 5%), I'll have paid down my mortgage to a 'normal' level and yet be living in a property I could never have dreamed of owning just a few years ago.
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Comments
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I'll bloody love interest rates to stay at 0.5% for the next three years. My morgage is only £129 a month! Ive never had so much money to spend on holidays, clothes and going out!0
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But think about the poor Tory voters with large cash balances, not only will they be suffering from vastly reduced services but they will be paying through their interest rates :eek: Then again Georgie did say we are all in it together.'Just think for a moment what a prospect that is. A single market without barriers visible or invisible giving you direct and unhindered access to the purchasing power of over 300 million of the worlds wealthiest and most prosperous people' Margaret Thatcher0
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If they can just go back up to where they were .... I won't have to look for a job any more.0
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PasturesNew wrote: »If they can just go back up to where they were .... I won't have to look for a job any more.
5 years is a long time to wait though.
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True for those with large deposits and access to low rates. That is not true for the typical ftb (well, depends on the rates).0
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but surely pre-2007 lending... the best rates and deals were "more" available to those borrowers that had higher deposits and higher earners = less riskProcrastinator333 wrote: »True for those with large deposits and access to low rates. That is not true for the typical ftb (well, depends on the rates).
why should it be any different now or are you saying there is more of a difference now between these two groups?0 -
Procrastinator333 wrote: »True for those with large deposits and access to low rates. That is not true for the typical ftb (well, depends on the rates).
I agree that FTB's with smaller deposits cant get the sort of rates that an existing OO with +40% equity can get, but they will still be able to get lower rates now than they will in 5 years, so it must hold true for FTB's as well as existing OOs.0 -
But think about the poor Tory voters with large cash balances, not only will they be suffering from vastly reduced services but they will be paying through their interest rates :eek: Then again Georgie did say we are all in it together.
If only the rich voted Tory they'd never get in!0 -
My mortgages are low (1.24% and 1.39%) so saving more than ever.
Also earning around 6.3% in Zopa before tax. I would have added some more funds to the NS&I RPI Trackers but as the ConDems have decided that they don't want my money I'll add more funs into Zopa. I won't be adding to the bank's unreasonable profits.
GGThere are 10 types of people in this world. Those who understand binary and those that don't.0 -
I'll bloody love interest rates to stay at 0.5% for the next three years. My morgage is only £129 a month! Ive never had so much money to spend on holidays, clothes and going out!
Or overpaying your mortgage as people should!!
I just hope it stays low until next June so my payments don't go up when the fixed rate ends!Trev. Having an out-of-money experience!
C'MON! Let's get this debt sorted!!0
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