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Interest rates in 2011

Interest rates

As a new year dawns, the housing industry is looking towards interest rates as sign of things to come in 2011, as dramatic rises or falls could have a significant impact on the sector.

On December 9th, the Bank of England's Monetary Policy Committee (MPC) voted to maintain the official base rate at 0.5 per cent, but speculation has been rife about whether this will change in 2011.

They won't?

The general consensus is that interest rates will remain low this year - a view shared by Michael Baxter, editor of Investment and Business News.

He explained: "They should stay low because inflation pressure is low. The problem you've got with interest rates relates to the problems in Ireland. If markets start questioning whether or not government debt is safe and if there is a history of the government defaulting, then that could push interest rates and markets up."

According to the expert, many people have calculated that the rate of interest needs to go up due to high inflation, but he said this factor is "irrelevant".

Such a rise in interest rates due to commodity prices would do "nothing", he argued, pointing out that it may even have a negative effect on many.

They will?

However, this is not a view shared by marketing agency Dallas Matthews, which said that rates will definitely rise at some point in 2011 and urged property owners to prepare for this eventuality.

The organisation's comments followed the publication of a report by the Council of Mortgage Lenders in December, which predicted that the number of repossessions in the UK will increase from 36,000 in 2010 to 40,000 this year, while the number of mortgages in arrears will rise from 175,000 to 180,000.

What a rise in interest rates would mean

Chris Jenkins, creative director at Dallas Matthews, noted that an interest rate rise would put many homeowners under increased financial pressure.

In addition, he pointed out that household bills are predicted to rise when energy firms increase their prices, so there is a possibility that a combination of the two will lead to more repossessions.

"My advice to homeowners would be not to bury their head in the sand. Interest rates will rise sooner or later and you need to prepare. Lenders will tell homeowners how much payments will increase in the event of a rate rise," he explained.

Mr Jenkins said that the key to staying debt free for many homeowners will be knowing the amount their payments will increase by.

The threat of repossession is definitely a prospect if interest rates rise, but that is unlikely to happen, according to Paul Holmes, chief executive of advice organisation Firstrung.

He said that a rise in interest rates is unlikely, certainly in the near future, as the MPC has several factors to consider.

The expert noted that international factors will play a key role, as UK interest rates will only rise if the same happens in the US and across Europe - which looks unlikely at present.

Mr Holmes said that if the rates did rise it would be "quite catastrophic" to the UK, as lenders would be passing on the increase to borrowers.

A rise in the range of two per cent could cause major problems and be "an awful lot for people to cope with", he suggested.

"If interest rates go up then mortgage rates go up, repossessions go up, the shares in the bank fall and the amount of liquidity that those banks then need off the government would increase. This means more bailouts, so the Monetary Policy Committee would take that into consideration," he added.

However, the chances of this happening are slim, he noted, as a significant interest rate rise could result in the UK operating in the global market in isolation.

At the non-governmental economic forecasting group Ernst & Young ITEM Club, the prediction for interest rates in 2011 is much the same as 2010, with little or no change.

Andrew Goodwin, senior economic advisor to the organisation, expects interest rates to remain low for "a fair while".

The specialist predicted that any changes may take years to come into effect, largely due to the fiscal policy tightening likely to be experienced in the UK over the next 24 to 36 months.

He explained: "The Monetary Policy Committee is going to have to keep monetary policy pretty loose to try and offset the dampening effects of the tightening policy. We may see rates on hold for several years yet."

For lenders, borrowers and homeowners, it seems that they may be in for more of the same in 2011 and beyond.