This is according to John Charcol’s Ray Boulger. Commenting on yesterday’s MPC decision not to change the base rate, he said: "Despite the ongoing improvement shown by the latest Services Sector statistics the more important retail sector continues to struggle.
“With this month's tax and benefit changes, including a 1% increase in employee National Insurance contributions for most employees, retailers are unlikely to see any respite in the near future and this lack of demand must be reflected in manufacturing orders. Furthermore, although the steady drip drip of petrol and diesel price hikes increases the likelihood of the CPI hitting 5% this year, it also further saps consumer confidence and reduces funds available for other retail spending.
"China, Vietnam, Taiwan, India, South Korea and Thailand have all raised their benchmark interest rates this month or last. More relevant to the UK are the interest rate policies of the ECB and the Fed. Too high a differential between Euro and UK rates would probably be a concern for the MPC, but the committee will also take account of US rates, and indications from the US are that its benchmark rate will remain at 0.25% for most, if not all, of this year. Indeed it doesn't plan to complete its current Quantitative Easing programme until June.
"Increasing Bank Rate would do nothing to restrain oil prices. Even if a rate rise dented UK consumers' demand for oil the impact on global demand, and hence its price, would be negligible. Hence the arguments the MPC has used to date to justify not increasing Bank Rate are still very valid.
“Furthermore a majority of MPC members are likely to want to assess the impact of this month's fiscal changes before seriously considering voting for a rate increase.
"Later this month the ONS will announce its first estimate of 2011 Q1 GDP. After the last quarter's figure of -0.5% it is likely to show very modest growth at best and another negative number at worst, which would take us into a politically very embarrassing double dip. The probability of more weak GDP figures in both the first and second quarters of this year adds weight to the argument that it would be premature for the MPC to increase Bank Rate at this stage.
"Despite a slight fall in the cost of the best 5 year fixed rate mortgages over the last month there remains a strong argument for having a variable rate but overpaying by making a similar monthly payment to that which would be required on a 5 year fixed rate - say 4.4% - 5%.
“Overpaying while rates remain low offers the twin benefits of reducing the mortgage balance, thus mitigating the impact of the higher payment required as rates rise, and softening the psychological blow when rates do rise.
“Anyone with a variable rate who adopts this policy would not need to increase their monthly payments until Bank Rate had increased by at least 2%."
