How will Brexit change our Economic Outlook?

So, at long last, there is a new 'play-thing' for us amateur economists to pontificate over - BREXIT. It's not like we are completely out of the woods regarding our economy, and I dread to think what our national debt figure actually is - but the focus has certainly shifted off the good ole Credit Crunch lately.
I admit I am late to the table with this one, and had I been paying more attention to this blog, I would have broached the subject earlier, so apologies for that.

Cards on the table then - I was a 'Remainer', and it's not that I have any great love for Europe particularly, but I am against rocking the boat for no good reason other then a vague belief that Europe is somehow holding us back. I am in favour of the 'stronger together' philosophy hence I was in favour of the UK remaining united too. I find it odd that some Scottish politicians could want 'out' of the UK, but 'in' to Europe - but I'm not going to get into that on this blog.....

So the 'Remainers' lost and the Brexiteers won - fair play, we now have a slightly different political landscape to deal with, and some very tricky terrain coming over the horizon. I have moved on (others appear not to be able to do so), but the result was remarkable for a number of reasons.
I will happily accept that broadly speaking, there are some good points that we will gain from gaining a degree of independence from Europe, although I would maintain that we can't be sure that they outweigh the negatives. So I am happy to assert that many well-meaning Brexit supporters actually believe in a solid economic argument.
That said, there are evidently swathes of others who somehow thought that they were voting for some sort of ethnic cleansing to the point where they have been emboldened to shout obscenities at foreigners in the street. These foul types (NOT Brexiteers, but thugs who have seen Brexit as a means to some sort of white supremacy) have been sold a lie by UKIP who have emerged as little more than the BNP in a suit and tie. UKIP (where are they now?) were given an extraordinary amount of exposure considering how little influence they have on anything (Their biggest power base is in the European Parliament!! - you couldn't make it up...). Their mouthpiece Farage (where is he now?) painted a picture of an immigrant-free UK with a well-funded NHS, when he had not the means to bring it about - He 'won' a referendum, not a vote for seats of power. When the party was over, he freely admitted that he was not able to make any of his promises happen - and how could he? He's not even got a seat in Parliament himself - his party is a shambles, their policies are virtually non-existent.

Don't get me wrong please, my disgust at the situation is not because the vote was lost, this is not sour grapes - I am disgusted at how we were led to this point by people with no power and no plan, and now those who could see it was a terrible idea are left having to carry it out. Yet I am not an advocate of a second referendum - that to me would be a nonsense, it would be like Alex Salmond demanding a referendum on the Scots leaving the UK every year until he finally got the result he wanted. No, we must carry it through and make the best of the hand we have dealt ourselves. My real problem is as I mentioned earlier, the belief amongst mindless thugs, that this is a victory for 'Engerlanddd' in post-National Front and post-BNP Britain.

I am thoroughly English and proud of it, yet I would welcome any foreign national genuinely seeking asylum, seeking respite from awful regimes and terrible life-experience, seeking education and work - these individuals enrich and enhance our nation. I am ashamed of the rampant nationalists, and fervently hope their number remains small and insignificant. I am slightly concerned that in post-BREXIT Britain, a line has been crossed where it is becoming acceptable to regard 'foreigners' with suspicion and not a little hatred - Europe has been there before....

Well that's the political rant, I know not everyone will agree with me, and as long as you don't advocate thuggery, I am happy to discuss the pro's and con's of Brexit without getting overly excited. I am looking forward to exploring some of the questions that surround the huge issue of how exactly we are going to extricate ourselves from the European Union.

Confirmed Base rate cut today

As expected, the news has just come through that the Bank of England has officially cut it's base rate for the first time in nine years, halving it from 0.5% to 0.25%.
Predicted growth in the UK economy has not materialised, and the Bank of England GDP forecast for 2017 has been slashed from 2.3% to 0.8%, citing changes in the 'economic outlook'. In effect pointing towards Brexit as a major factor.
The BoE has introduced other measures to go alongside the latest interest rate drop. A £60bn quantitative easing package has been announced alongside rulings that will more or less force the banks to pass on the base rate cut to their borrowers.
It has been calculated that the average mortgage saving will be around £20 per month, but it should be noted that only around one and a half million mortgages actually track the base rate. I am happy to say that my own mortgage does, but on the other hand, I have an endowment which will not meet the repayment target. Where I am saving on interest, I am paying extra off the principal to help to close the gap between likely endowment outcome and the principal amount owed.
An endowment is, of course an investment, so how will the interest rate drop affect investments? Simply put, if you had £10,000 invested, a 0.25% drop means you will receive £25 less than previously which should mean you get a measly £40 or so for your hard-earned cash. I can remember the days when you would expect to make a grand from a ten grand pot, so saving your money seems almost pointless if you are hoping to live off the interest.
The positives here are obvious for (some) home owners, but overall, with a falling GDP and little return on money in a deposit account, the general economic mood is not overly positive. That said, we are not currently on target for another recession, and there is every indication that there could be another base rate cut, which could leave us with an unprecedented zero percent base rate

Bank Base Rate drop expected today

After years of waiting for the next interest rate announcement, it may finally be announced today. Up until the Brexit vote, I am sure most commentators would have expected an interest rate rise to be the next Bank of England move, but post-Brexit Britain brings with it a somewhat less stable economic environment.
The new rate is expected to be a drop from 0.5% down to 0.25%, meaning an average mortgage saving of £20-£25 per month. Of course, many current mortgages are fixed rate and will not benefit from the drop.
More to follow when there is confirmation....watch this space

Finally interest rates set to rise

Increasingly, even the most pessimistic observers are finding that the main economic indicators are signalling a strong recovery from the financial crisis some six or seven years later...

I am sure there will be politicians queuing up to take the credit just as there were those ready to apportion blame, but these things are notoriously cyclical - we always knew it would eventually resolve more or less regardless of the economic action taken by the various politicians.
The good news also comes along with the 'bad' news that interest rates are set to rise...and fairly soon. Again, we always knew this would be the case, but for those of us who have benefited from low mortgage rates, the reality of the end of the gravy train is just around the corner.
No definite dates as yet, but indications are that the end of this year or possibly early next year will bring a tentative rise in the current 0.5% base rate currently applied in the UK. I expect that it will be several years before the base rate reaches anything like it was before the dramatic drop five years ago.
Of course, I am calling it bad news as a mortgage-payer, but a net investor will be thankful that there is a prospect of getting a better return on investments at long last - also as my mortgage has an element of endowment, there is actually a kind of 'leveling out' of the good news versus bad news scenario even for me.
There is also speculation that this will slow down the property price rises that are starting to kick in particularly in London where housing is so tight, and seeing as it was in part, property prices that led to the original recession, this is possibly no bad thing...

Two basic questions remain then:

'When?' and 'How much?' there is a suggestion in the media that the rise will come before the general election in May 2015, maybe even well before. As for the new level, it will probably be set at 0.75% or possibly 1.0%. A full 1.0% would be more of a bold statement of intent and could be seen as a level that could be maintained longer-term, a mere 0.75% might leave the markets nervous wondering how long before the next 0.25% is added...
For those who have recently bought property on low interest mortgages, a rise in rates will be a new and unwelcome experience - although such a small change in rates is surely not likely to leave home owners without the means to pay their mortgages.
Personally I am currently still overpaying my mortgage, so for me it will simply be a matter of reducing my over-payment so that the overall outgoings remain the same.

Related posts:

Feb 2009 - imminent drop in interest rates
Mar 2009 - base rate set at 0.5%

False Economy?

Whilst the economy needs steady management with long-term goals in mind, Modern politics does not really allow for long-term planning. Already the Greek population are striking against the government they only recently voted in, rebelling against austerity measures which are aimed at keeping the national economy solvent.

This feeling is not limited to the hardest hit of the European economies, grumbling about cut-backs is widespread, and if I am allowed to express opinion, I believe it is short-sighted to rebel against measures that will ultimately create a 'meaner and leaner' economy. The problem here is that the public are finding it hard to understand why the public purse has been tightened so suddenly, especially when they find themselves out of work when there are very few jobs to be had.

There needs to be a two-pronged approach, introducing more efficient use of public funds whilst enabling businesses to grow, however there is a problem in that putting more controls on bank lending means it is harder to obtain small business credit. Ironically, interest rates are at an all-time low, yet money is not avaiable to those that need it most

Here is another problem, we want to control the way that the banks take risks with loans, but on the other hand, we need the banks to fund regeneration in the economy - or do we?

With the reluctance (whether voluntary or forced) of the banks to lend out the required cash, other organisations are stepping in to lend a hand and provide a much-needed injection of cash. Maybe this will be a long-term change, a change in the way that industry is funded, maybe it will all get back to 'normal', but whatever happens, we are by no means in control of the economy yet which is why I believe only hard graft will get us back to an economic plateau, and only extraordinary diligience will stop this happening again in the future.

The struggling economy

It is no surprise to this pessimistic blogger that the western economy is still not showing the vital signs of growth. From the start, it has been blatantly obvious that this current economic crisis is NOT 'man-flu' on a huge economic scale, but a serious disease that requires not only a painful cure, but a subsequent change in lifestyle. What ails the western system is more akin to a kidney disease, not only requiring on-going dialysis, but a donor kidney and if surviving... a new healthy regime.

Whether that new lifestyle involves bringing the bankers to heel is a moot point - George Osborne (UK Chancellor) is about to argue that Europe is wrong to strangle the banking sector by capping the bonus culture. Controlling pay is certainly an odd idea for what is supposed to be a 'free economy', and although I would like to see the banks take a hit, I would prefer to see them taxed rather than shackled.
Meanwhile the investigation into 'Libor' rate rigging is extending into Europe with Deutsche Bank also coming under scrutiny, while the Euro currency struggles to keep pace with rival currencies.
Let's be blunt - right from the start (barring a few rather silly optimistic predictions) it was clear that the credit crunch was no ordinary economic 'blip', and always had the potential for fatality (of the entire economic system). Every slight recovery was welcomed as a possible 'cure' when in reality we are looking at shallow remission at best. Every dip has been hailed as evidence of political incompetence, whereas it has just been the normal course of the disease.
The disease has been one of indulgence, so maybe a liver complaint would be a better comparison, where the patient will have to lay off the booze if they want to see a future? We are not out of the woods yet, anybody with an economic clue should be able to accept this, the fact that the crisis is not playing to our political agenda of 5 year plans is just a fact we have to get used to. Western democracy has only to look 5 years into the future because that is the normal period between elections - If I had a disease that was going to take 10 years to cure, I would rather not choose a Doctor who only has 5 years left to live himself...!

UK banks under pressure

As Europe tries to sort out bail-outs and attempts to keep the Euro afloat, UK banks have scored a number of 'own-goals' in recent weeks.

We have Barclays being handed a massive fine of £290million, for it's dodgy dealings with banks rates.. within days we had RBS having catastrophic software problems that meant a massive backlog in their payment system. This has prompted the CEO of RBS to turn down any bonus that he would have been entitled to this year (whilst still maintaining that this was the result of previously existing systems).
Today we have the news that the big four banks have all mis-sold complex 'products' to small businesses designed to 'protect' the businesses from interest-rate fluctuations, but ending up as a massive weight around the neck of many a small business.

These news items taken separately are not earth-shattering revelations, but in the wake of the bank-inspired credit crunch, and the ensuing financial mayhem - we are reassured that the banks have done little to put their financial houses in any sort of good order. The banks seem regardless of their public image, ignorant of popular feeling and may yet feel the wrath of both regulatory authorities and the popular vote.

Bank of England meets this week

Quantitative Easing will be one of the main topics on the agenda with views spilt over whether more is needed in the light of recent tentative signs of economic stability, and uncertainty over the rate of inflation and the impact of oil price rises.

Most observers are not expecting a change to the Bank Base Rate any time soon, which is great news for some house owners (me included). When pushed on when the base rate may be raised, the general view is that rates will be stable at the all time low 0.5% for at least another 18months.

QE and base rate being two of the main weapons in the Banks armoury, it looks like a economic cease-fire might be called sending a 'steady as you go' message to the markets.

President Obama shifts the blame to Europe

Right at the start of this post, I want to make it clear that I have generally been in favour of President Obama, from this side of the pond, he looks like a great choice for US president. Intelligent and dignified are not necessarily attributes that other recent candidates can claim as their own. However, I have to take issue with his recent attack on Europe, particularly as the whole sub-prime fiasco is firmly rooted in his own back-yard.

The left-wing view has been that huge national debt is an acceptable price to pay for the mismanagement by our banks. Cut-backs have been looked upon with disdain by the socialists as if there is a way to continue to over-inflate the economy despite the glaringly obvious fact that there is nothing left to do it with unless we sell the family silver... The balanced view is surely that we must do what we can to pay down the debt including down-sizing where the markets are proving unsustainable.
I have been unemployed, so I can empathise with those that are suffering, but the truth is that the economy was over-inflated by debt - the whole of the Western economy was simply living beyond its means, shored up by bad debts. The only fix is to try and get the economy back to a sustainable size, painful though that will undoubtedly be.

Look at it like this, let's say for a simple example that the economy is 10% over-inflated - effectively we have been living 10% beyond our means for a sustained length of time. This is supported by bad debts - in other words, there is money floating around in the economy that simply should not be there, buying goods and services that we can't actually afford - persuading employers to employ 10% more workers than are sustainable. This money is secured against property that is worth less than the value of the debt. The American (Obama) solution is to try and shore up these bad debts, ie. to try and continue the unsustainable economy to the point where defaulting on the debt becomes a very real possibility.
The irony of Obama's criticism is that countries like Greece face exactly the same problems that he himself has experienced recently. It was only a few short months ago that the US itself was staring at the possibility of defaulting on it's debt. Obama has presided over the US whilst it's credit-rating has been reduced - an achievement that hardly qualifies a man to urge the rest of the world to follow his example. The situation in Europe is serious because Economic Europe has taken weak economies under it's wing believing it has the resources to protect them. The UK is outside of the European Economic currency, but will not be immune if economic collapse comes knocking.

Even Gordon Brown understood the value of 'talking up' the economy, I doubt that Obama's outburst will shake the world, but it takes a certain arrogance to put your own political ambition for re-election ahead of the stability of the world economy. I hadn't appreciated Obama the political animal until now - I stand corrected, maybe he's not the shining example, he's a politician after all..

It remains to be seen how Europe will deal with this crisis, but the majority view of the voting public is that they don't want to bail anyone else out of debt. What the individual voters in neighbouring nations don't appreciate is that much of the debt is owed to them. I have heard fellow-Europeans saying 'let them default' without appreciating that Greece now owe EUR120bn to the IMF and the European Union - In contrast many Greeks still believe that Germany 'owes them' for the damage done in WWII, so there is a strong contingent in Greece saying 'let's default'. Ironically the position of the average man in the street in both Greece and Germany is that Greece should default. The Germans not appreciating that the debt is owed largely to them - and the Greeks not really appreciating that their government is not really in a position where they can pump money into their own economy and just not bother to pay their debtors.
Of course, it's not just the Germans who are complaining, there is a strong view in the UK that we should be exempt from further Euro-bailouts as we have our own currency to protect, but it should be made clear that the UK will suffer alongside it's European neighbours common currency or not..

More Quantatative easing on the way?

The Bank of England have maintained the base rate at 0.5%, resisting pressure to match the US rate and drop to 0.25%. In the light of general economic doom and gloom, more quantatative easing measures are likely to be considered although no action is planned immediately.

In short, all the signs are that any previously perceived recovery has been long forgotten in the shadow of a potential double-dip recession.

Interest rates could stay this low until after 2012

Financial commentators are starting to speculate whether interest rates will move at all next year (2012). This implication being that it could be 2013 before we see any chance in this unprecedented low base rate. The UK has never seen interest rates held at such a low rate, to sustain this rate for the forseeable future is testament to how seriously the BoE take the crisis, it also indicated that the crisis is far from over.
Nett investors will be pulling their hair out - those with a mortgage will be delighted to hear the news. Those with tracker-type mortgages will be able to continue with thier miniscule repayment rates - even those with fixed rates should be able to negotiate a better deal as the long-term prospects start to look more certain. I would urge those who are making good savings to consider making over-payments (after consultation with a financial advisor of course..) to lower the principle amount of the mortgage. This has the effect of lowering repayments in the long term, and is especially important if, like me, you have an endowment mortgage that will not materialise into a pot big enough to pay the mortgage off in full.
I have used the principal of retaing the level of payments that we were paying about three years ago even though the actual interest payment has dropped dramatically. The extra we are paying is reducing the original debt (principal) which is good for two reasons:
It means the amount raised by the endowment will be closer to the actual amount owed
As the principal is being paid off, the amount of interest keeps falling even when the interest rate is steady.
Of course, one has to bear in mind that the endowment itself will grow in a very restricted rate during this time of low interest, but at least by over-paying whatever happens, we will be doing our best to overcome any of the negative effects. One other thing to bear in mind is that when rates eventually climb again, all the overpayer has to do is reduce the overpayment to maintain the same standard of living. The temptation is to spend the 'extra' money released by low interest rates - which will mean an adjustment of spending patterns when the rates come back up - an adjustment I would rather not have to cope with..

Time to remortgage

Mortgage rates are about as low as anyone can remember right now as lenders seek to entice home owners with attractive interest rates. With the slow-down in the housing market this is hardly surprising. Normally you would expect lower house prices to attract house buyers almost regardless of the mortgage rates. Sellers are seemingly holding out for higher prices and just not selling at the rate that demand dictates, therefore the market has slowed in it's activity. In order to keep the market going, lenders are having to offer great deals.

What this means, is that if you don't have a tracker mortgage, you may want to remortgage to take advantage of the low rates.

Bank base rate is still holding at 0.5%, so there has never been a better time to remortgage - this rate has persisted for nearly two and a half years now and shows no indication of rising before the end of 2011.

Some fixed deals are available for about 3 or 4%, depending on the term of the mortgage, the longer term, the higher the rate indicating the expected course that interest rates will take. Be warned though, unless you will be making an interest saving of £1000, the cost of the remortgage will be higher than the savings you can make.

There are tracker deals about too, but unless you got yourself a tracker BEFORE the rates dropped so low, this is more of a gamble. Those who managed to secure a tracker before the rate dropped, may have one that tracks about 1% or even less above base rate, however base rate is so low now, that you will be lucky to find one that tracks less than 2% above.

If you are thinking of remortgaging, by all means take a look at all the offers out there, but also get the advice of a good independent advisor. At the same time, don't be frightened to tell the advisor exactly what you want - take a wish-list with you, and ask the advisor to find a mortgage that fits your requirements.

Twice I was persuaded (against my better judgment) to go with fixed mortages, until I insisted last time that I wanted a lifetime tracker mortgage. Again it cost £1000 (I just hate those sign-on fees - which is why I insisted on a LIFETIME tracker), but we have made tremendous savings since the rate went so low. This has allowed me to overpay my mortgage for the last two years. There is a kind of financial karma in this since we have a endowment mortgage which is unlikely to pay off the loan when it matures - overpaying means there will be less of a loan to pay off. I reckon we have paid off about 6 or 7% off the principal in the last two years through overpayment, another year of this and we will have paid off 10%.

It goes to show that no-one knows what will happen over the term of a twenty-five year mortgage - it tells you to be wary of the markets, but also tells you that whilst you are on the swings now, the roundabouts are just around the corner...

Interest rates remain stable

Despite a growing concern that interest rates will be on the way up, the Bank of England have kept UK base interest rate at 0.5%. This is great news for those with a tracker mortgage, not so good if you are a net investor...
I am continuing with my philosophy of over-paying my mortgage whilst the going is good, in the hope that it will stand me in good stead when my endowment matures. Whatever happens, I am quite sure that it will not do me any harm at all to try and lower the amount I will have to pay back to the bank in about 10 years time...
I anticipate that further measures will be needed before I can be sure that I can cover the full cost of the mortgage, but at least the impact will have been lessened by this bonus period of low interest rates.
The reason that the BoE have not raised interest rates is the continuing doubts about whether the UK economy is strong enough to accept higher rates. Whilst we have avoided double-dip recession this time, there are still concerns that GDP is not growing as was hoped.

RBS still happily handing out bonuses

UK Financial Investments (UKFI), which manages the Government's bank assets, is expected to give its approval of RBS CEO Stephen Hester's (near £8m) pay packet at the group's annual meeting in Edinburgh. Mr Hester took over the job from Fred Goodwin in 2008, and has been awarded an additional £4.5m potential shares windfall on top of his £2m annual bonus and £1.2 million salary. He and eight of his top team will share a bonus and shares windfall totalling £28m for its 2010 financial year.

RBS is 83% owned by the taxpayer following the bank's near collapse at the height of the financial crisis, and is expected to face wider shareholder anger when the remuneration motion (of almost 400% of salary) comes to a vote.

Project Merlin

The idea of Project Merlin held some hope of holding the banks to account for the misery they have spread through the economy, although in reality the measures could never be as punitive as the larger population would like.
We rely too much on our financial trading to make it unprofitable, it is one of the few remaining sectors that the modern UK now excels at...

What concessions have been drawn out of Project Merlin?

• To lend more money in 2011
• To lend more to small businesses
• To pay less in bonuses than they did last year
• To be more transparent about their pay packages
• To make a greater contribution to regional economies and society.
  

Who has signed up?

• HSBC
• Barclays
• Royal Bank of Scotland
• Lloyds Banking Group

Santander have also been involved in the project

To add in some specifics, the banks that have signed up will commit to making £190bn of credit available to businesses in 2011, up by £11bn, £76bn will be made available specifically to smaller businesses.

The banks will also provide £200m capital to David Cameron's Big Society Bank, which is supposed to finance community projects, and they will provide an extra £1bn over three years to the Business Growth Fund, which aims to help small business in hard-pressed parts of the UK.

And bonuses?

To be fair the banks have agreed some realistic controls, but there is not going to be a huge reversal of the bonus culture. Millions will still be earned by the few in salaries and bonuses

Was it worth the effort?

The agreement is a realistic 'moral victory', something was required politically, and this was the result. It will not make tremendous waves through the financial sector, and as one of the leading 'industries' of the UK, it makes little sense to 'hamstring' the banks. The banks have been in the spotlight, they created much of the mess, they have been the first to see a turn-around in fortunes. It would make little economic sense to stamp on the growth that is now starting to show. On the other hand, the banks have been caught out, and made to publicly acknowledge their part in the financial crisis - it's time to move on.

Spectacular Bank Failures

Economist John Vickers, chairman of the Independent Commission on Banking has slammed the British banking sector in a speech to the London School of Economics, he said:

"Ultimately, financial risks have to be borne, and in a market system they should not be borne by the taxpayer providing a generous safety net."

This at a time where banks feel they are ready to start paying themselves huge bonuses again, many CEO's already raking in millions in so-called 'performance-related' payments. The question that the nation is asking is "what do you give back when your performance is so dismal that the nation ends up footing the biggest tax bill ever generated?", the answer is of course, a resounding 'nothing' - even those who have skulked away in disgrace have already feathered their nests to such an extent that they are in danger of choking on their own hollow affluence.

In the meantime, the nation suffers with cuts to services in every sector, industries losing workers and long-established companies failing. Whilst many will regard this as just 'politics' or 'economics', for some this is their life... Some families will suffer hardships, real hardships - the cause of which can (whether it be directly or indirectly) be traced back to foolhardy, gung-ho actions of the financial institutions.

Admittedly, the economy had become over-inflated and therefore some workers owe a few years wages to the over-inflation, nonetheless, I believe on balance, it is likely that there has been more harm done than good.

£7bn from UK to bail out Ireland

Chancellor George Osborne has said that Britain was prepared to commit seven billion to the Irish bail-out plan. The EU and IMF agreed on Sunday to help bail out Ireland with loans to tackle its banking and budget crisis in a bid to protect Europe's financial stability.

"What we have committed to do is to obviously be partners as shareholders in the IMF in an international rescue of the Irish economy,"

Osborne told BBC Radio 4....

"But we have also made a commitment to consider a bilateral loan that reflects the fact we are not part of the Euro ... but Ireland is our very closest economic neighbour."

Osborne was questioned about reports that Britain was going to contribute around seven billion pounds to Ireland, he replied:

"It's around that (figure), it's in the order of billions not tens of billions but the details of the entire package, not just the UK contribution, but the euro zone and IMF contribution, that is all being worked out as we speak and we should by the end of the month have the details on that."

Osborne was keen to stress that Britain should not have to provide further help to Ireland or any other Euro zone countries that got into trouble. However this contribution by Britain is causing trouble at home amid an atmosphere of spending cuts - there are claims that this bail out makes a mockery of the hardships Britain will endure as a result self-imposed austerity measures. The criticism is heightened by claims that this is a problem that arguably should be resolved primarily by the Euro-currency countries.

Interest Rate warning!

Official figures just released show that the economy is growing at its fastest rate for a decade. Growth over the past six months reached 2 per cent, the fastest pace of expansion over two consecutive quarters since 2000, according to the Office for National Statistics .

Economists warned that the 'good news' could be result in interest rates rising earlier than expected. Andrew Sentance, a member of the Bank of England's monetary policy committee, said "I am in favour of gradually moving interest rates up from their very low level which I think can be done without disrupting business or consumer confidence."

Interest rates have been at historically low levels since the credit crisis took hold, with the Bank of England keeping rates at 0.5 per cent since March 2009. It had been previously reported that there would be little chance of a change before the end of next year, but on the back of yesterday's strong growth figures some economists are now predicting a base rate of at least 1 per cent by the end of 2011.

As always with interest rate rises, the bad news for borrowers is good news for savers. The majority of savings accounts currently on the market fall some way short of offering customers a decent return on investment. Recently I came across a saver who had £11return on a three year bond of £3000.

David Kern, chief economist at the British Chambers of Commerce, reminded us that we have not yet seen the real impact of the Governments deficit cutting measures. True to form, the coalition are claiming the upturn as a result of their actions whilst the previous administration claim that this is as the belated result of their actions... The truth is that few people (from either party) predicted these most recent results, and at the end of the day, the economy wends its own merry way regardless of those that believe they are at the helm of national affairs.

Inflation Steady at 3.1%

Inflation has continued to exceed the Bank of Englands target of 2%, standing at over 3% since July in line with market expectations.

Lower prices for air fares, petrol and second-hand cars were offset by rising costs for clothing, footwear, food and drinks. For individual families, the worrying trend indicated here is the fact that 'luxuries' are getting cheaper, necessities are becoming more expensive...

The BoE have continued to hold the base interest rate at 0.5% (as they have for the last 19 months), but opted against pumping out more cash. Nevertheless, the threat of the return of 'Quantitative Easing' is ever-present. To date, the bank has injected £200 billion into the economy, by purchasing government bonds and high-quality private sector assets to boost lending.

The Recovery

The recent financial crisis is becoming a faded memory, but there are some significant points about what has just happened that will have an impact on the coming years. Oddly enough, during the recession, UK householders actually experienced a significant increase in spending power because of the incredibly low interest rates. Any mortgages that have been linked to the Bank of England base rate have dropped significantly allowing families to ride the storm with comparitive ease (assuming that income has been maintained).
Mortgage rates are not set to move just yet, but it must be accepted that these low rates cannot be retained indefinitely and sooner or later will rise at least part way back to the previous level. THIS is when the impact will start to hit home a little more. Personally I have decided to overpay my mortgage while the level is so artificially low, in my opinion, regarding this boost as avaiable income may be a huge mistake. The rate has been below 1% for nearly 18 months, and I am guessing that this has put a couple of hundred pounds or more into many households pockets during the recession. If this money has been incorporated into the household spending, when the base rates resumes it's previous levels, this extra budget will have disappeared, and spending must follow suit otherwise we may find ourselves exposed to debt.
My own plan is to gradually cut back on the overpayment as the interest rises until I am left with no overpayment. The added bonus of the overpayment is of course, that I am paying off the capital at a faster rate than if I pay the minimum rate that my mortgage demands. The result of this is that the actual interest on the diminishing principal is falling too.
In the light of financial measures that will be taken to resolve the national debt issues, average incomes are likely to be more or less static for the next few years, a rising interest rate may leave families feeling the effects of the recession that they previously managed to avoid.

related posts:
bank rate drops to 1% (Jan 2009)
declining base rate (Feb 2009)
interest rate news (Jan 2009)