Melanie Bien: Don't relax just because interest rates didn't rise

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The Independent Online

Another month, another interest rate announcement from the Bank of England's Monetary Policy Committee. But unlike previous decisions, which have been discussed endlessly beforehand and analysed extensively afterwards, this one had very little attention paid to it.

Another month, another interest rate announcement from the Bank of England's Monetary Policy Committee. But unlike previous decisions, which have been discussed endlessly beforehand and analysed extensively afterwards, this one had very little attention paid to it.

Nobody, not one lone voice, expected the Bank to raise the base rate - and it didn't. All the analysts polled by news agency Reuters at the start of last week expected rates to remain steady at 4.75 per cent. If there had been a rise, it would have been a real shock.

This doesn't mean we're out of the woods or that homeowners needn't worry themselves about further increases in the cost of borrowing. Many economists expect at least one more quarter-point rise, with November the most likely month for this.

But few foresee many more increases, if any, after that. Several market watchers even feel that the base rate is already at its peak.

This is because recent economic data show that the five increases in the base rate in the past nine months have had the desired effect. Household spending slowed sharply last month, according to the Confederation of British Industry, and total household borrowing also slowed in July, mainly because fewer people decided to take out mortgages as consumer confidence in the housing market fell.

The result of fewer buyers competing for bricks and mortar was that house prices actually fell for the first time in two years last month. According to the Halifax, prices were down by 0.6 per cent in August, the sharpest dip since December 2000.

House price inflation is expected to slow gradually throughout the rest of this year and into next year as first-time buyers find it even harder to get a foot on the property ladder.

One encouraging factor to emerge from the economic data is that the message about consolidating your debts and not paying more than you need to finally seems to be getting through. Independent financial adviser Bradford & Bingley reveals that the number of people remortgaging in July was higher than at any other time this year.

With manufacturing also declining last month, the Bank is likely to keep rates at their current level for another month or two. They could, though, go up after that, once the authorities have had time to assess whether the impact of the rises has been temporary or more enduring.

Several economists predict that the base rate will start falling only at the end of next year, so it would be premature to get excited about low-cost mortgages any time soon. That said, a number of lenders have introduced significantly cheaper fixed-rate deals recently. If the base rate has peaked - or if it rises by just another quarter point - these will come down further. So it may be worth holding off for a little while before opting for a fixed rate, or at least getting a short-term fix rather than tying yourself up for 10 years or more.

Better value is still to be had among discounted rates, though you should opt for one of these only if you are confident you could cope should the base rate rise significantly. But with all the indicators suggesting otherwise, a discount may not turn out to be the risk it seemed just a few months ago.

Those who have started chipping away at debt on credit cards or overdrafts - because they were worried about rates rising further - should continue to do so. Debt is still expensive. As our panel of financial advisers tell the reader who undergoes a financial makeover on page 25, there's no point having cash in a savings account when you're paying a higher rate of interest on a loan.

If you're more concerned about returns on your savings than charges on debts, shop around for the best deal. Several providers are offering more than 5 per cent gross interest on savings accounts, so there's no need to put up with an account paying a poor rate.

Even better, utilise your mini cash individual savings account allowance first as returns are tax-free. You can invest up to £3,000 by 6 April. Abbey pays 5.35 per cent on balances of £1, for example, and you don't have to give notice on withdrawals.

m.bien@independent.co.uk

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