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Shock rise in interest rates - 11 January 2007

The Bank of England today surprised the property market and the City by raising the base rate of interest to 5.25 per cent, in a move designed to keep inflation under control. Although a rate rise had been expected in the near future, most analysts thought that it would come this time next month. The new rate is the highest seen in the UK for five and a half years.

The news comes as a blow to homeowners at the beginning of the New Year, and will add £16 per month to a repayment mortgage of £100,000. Despite Bank of England policymakers raising interest rates twice during 2006, inflation has climbed to 2.7 per cent, according to the latest figures. This is the highest in more than a decade.

For this reason, some commentators are praising the Bank for acting swiftly to protect the economy. The news was described by the Institute of Directors as "tough but wise". With inflation well above the government target of two per cent, some experts predict that it will go above the three per cent threshold in the latest figures, due later this month.

In fact, it has been suggested that the move is in response to the government’s advance knowledge of the new inflation figures, and that they are acting now to offset the impact of the news.

At the same time, employer groups have suggested that the move could harm struggling small businesses, and the FTSE 100 fell on announcement of the rate rise amid fears that company growth could be restricted. The UK property market is also likely to suffer, coming at a time when there have been a couple of months of strong growth in the market. The rise in interest rates could lead to a slow month of sales as buyers adjust to the changes.

In a separate move, the European Central Bank has held Eurozone base rates at 3.5 per cent. Despite signs of economic recovery beginning to emerge in Germany, fears over the French economy in 2007 are beginning to surface. Keeping rates the same should stimulate continued growth, and protect other economies.

This could mean that anyone looking to buy an overseas property in the near future would be wise to consider a Euro mortgage to finance their purchase, thus taking advantage of the lower interest rates.

Managing Director of Conti Financial Services Simon Conn commented, “We always advise Eurozone buyers who are renting their properties and receiving income in Euros to consider a Euro mortgage to make things simpler.

“Independent advice in individual situations is indispensable, as advisers will be able to point consumers to the best solution for their circumstances. We may see some deflection in the UK market, which could lead to more buy-to-let investors and first-time buyers looking at the overseas market as better value than the UK.”

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