This is the consensus of the mortgage industry, though like the Bank of England’s Monetary Policy Committee, the industry has its own hawks calling for a rate rise later today.
The MPC will vote on whether to keep the base rate on hold at noon today. Despite MPC member Andrew Sentance voting for a rise in both June and July, the MPC is expected to keep rates on hold at 0.5%.
That will come as a relief to most in the mortgage industry which is overwhelmingly of the view that a rise in rates could tip the economy back into recession.
Paul Hunt, managing director of Phoebus Software, said: “As a country we cannot afford to upset the current balance of the economy by increasing rates too early. They should be kept low for as long as possible to allow the economy to grow and stabilise before such measures are considered.”
Industry experts fear that families are still relying on low interest rates to meet ends meet and a rise now, ahead of further tax rises such as the lift in VAT from 17.5% to 20% in January, will be too much for people to cope with.
Matthew Fleming-Duffy at London-based broker Abacus Financial, said: “Many households and small businesses are certainly feeling the strain as a direct result of the financial crisis we experienced a couple of years ago. Some commentators even talk of ‘mortgage prisoners’.”
And Mark Lofthouse, chief executive at Mortgage Brain, added: “To burden households with more interest payments at this stage in the recovery could be detrimental. The MPC will hold rates when they vote later today.”
Hawks amongst us
But there are those in the industry who believe that the base rate remaining at 0.5% is distorting the recovery and presents a larger risk to the economy than the tightening of spending that would result from an incremental rate rise tomorrow.
Peter Williams, executive director of the Intermediary Mortgage Lenders Association is in the same camp as MPC member Andrew Sentance. Both are hawkish about where interest rates should be heading.
Williams said: “I think interest rates are unrealistically low now and the danger is that people are building low rates into their assumptions about how they can operate financially, which is structurally bad for the market.
“Lenders are also struggling to manage through low interest rates. I think we need to see a steady upwards drift in the base rate over the next 18 months to allow people to adjust gradually. I’m not arguing for a return to historically high rates, but certainly upwards of where we are now.
“That would allow lenders to increase their mortgage supply which would have a stabilising effect on the housing market and would feed through into the wider economy. I think it’s time we start to think about returning to a new sense of normality.”
Mark Posniak, of specialist short and medium term finance provider Drawbridge Finance, has some sympathy with Williams’ viewpoint.
"There is a view that if rates actually start to rise sooner rather than later, but in small incremental steps, this is far less likely to have a detrimental effect on the property market, than a prolonged low interest rate environment followed by a sudden large hike," he said.
"The market has already begun to price in small interest rate rises, so if the up-cycle is managed smoothly to avoid shocks, this will enable the economy, market and borrowers time to adjust."
Front line brokers
But brokers on the front line say this would deliver a payment shock to people that could damage the fragile stability we have now.
Fleming-Duffy said: “Whilst I am not an economist, I can speak with some authority on the effects of the downturn on families and businesses alike. Yes, the base rate is artificially low; however we are yet to feel the effects of the government’s cuts to public spending and consumer confidence could take a severe knock if decisions are being made that do not take into account the sentiment of the proverbial ‘man on the street’.
“Quite simply I fear that pushing the rate up now could endanger the fragile growth we are currently experiencing or, if we needed to reduce the rates again in the near future if the economy stalls, could question the collective wisdom of the MPC.”
Common ground
Consensus suggests that we have a while to go yet before the MPC votes in favour of a rate rise though.
In spite of his sympathy with the benefits of an incremental increase, Posniak added: “The MPC will almost certainly leave interest rates on hold today with Andrew Sentance again the lone voice calling for a rate hike.
“Rates will inevitably rise at some point but it may not be for some time yet. Although there is a degree of uncertainty surrounding the impact that rate rises will have on the market, they are a necessary evil, and a key step back to a more normal functioning of the economy and lower inflation.”
Hunt said: “Rates will be held today and will remain low for some time – probably until well into 2011 – but inflation needs to be monitored carefully. At 3.2% inflation we’re well above the target level of 2% and the New Year VAT increase will push inflation even higher. The first quarter of 2011 will be a critical time for the MPC and they will have to make the right call.”
Stuart Law, Chief Executive of Assetz, said he did not think interest rates would rise for months to come.
He said: “Interest rates will stay low for a very long time to compensate for the recent tax increases and spending cuts to help pay off the national debt, which will have an inevitable drag on the overall economic recovery.
“I would not be surprised if the base rate is still at 0.5% at the end of 2011 although there is a 25% chance it will have increased to 2% in this period. This is great news for homeowners on lifetime tracker mortgages and is likely to encourage even more buyers into the market.”
Mark Blackwell, managing director of mortgage software firm xit2, said: “Rates will be held at 0.5% today. The volume of housing transactions at the moment is so low it’s unlikely the property market is going to force the MPC’s hand. It’s likely that rates will edge up in mid-2011. Anyone calling for an increase any sooner will have the suspicion of self-interest hanging over them. Even Mervyn King has said he foresees rates staying low for the foreseeable future.”
What do you think should happen to interest rates, both today and in future months?
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