City & Business: Relief for mortgagees

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The Independent Online
Home owners can probably heave a sigh of relief. Most City economists believe the Bank of England's monetary policy committee will leave the base rate unchanged at 7 per cent when it meets on Wednesday and Thursday.

A minority, led by HSBC, Deutsche Morgan Grenfell, and Lehman forecast a rise to 7.25 per cent. Their argument is that the central bank will move to damp down the inflationary effects of strong GDP growth and consumer spending, along with a tighter labour market.

But the majority believes there are more powerful counter-arguments. To wit, 1) the housing market has probably peaked, 2) the inflationary impact of windfall receipts from the Halifax and other ex-building societies has been muted, 3) an interest-rate hike would push up the pound, which would hurt already smarting British exporters, and 4) last week's gyrations in the stock market were deflationary for the global economy.

The real issue facing home-owners is what is going to happen to interest rates longer term.

UBS economist Andrew Roberts says rates are due to peak later this year or early next - not above 8 per cent - and then head down. To those who think differently he points out that the long-term trend in interest rates is unequivocably down. In 1990 interest rates peaked at 15 per cent and in 1980 at 17 per cent.