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Interest Rates To Hit 1.25 Per Cent By The Year End

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words, words, words

Telegraph link

Any rise in interest rates would end nearly two years of stability with record low interest rates of 0.5 per cent, hitting the majority of mortgage holders, but giving some hope to hard-pressed savers.

Leading economists seized on a key passage in the governor's letter to George Osborne, the Chancellor, explaining why inflation was above target for the 13th consecutive month. They said Mr King's words were a clear signal that interest rates could rise three times before the end of the year, to hit 1.25 per cent.

The official data revealed that inflation, as measured by the Consumer Prices Index, climbed from 3.7 per cent in December last year to 4 per cent in January, the highest level for over two years. The surging price of oil, petrol and the increase in the rate of VAT, which pushed up the price of alcohol and restaurant meals, were the main reasons for the jump.

Mr King warned that the immediate outlook was one of continuing rise in prices, because of the high price of oil, wheat, copper and other commodities on the global markets.

Mr King said: "Inflation is likely to continue to pick up to somewhere between 4 per cent and 5 per cent over the next few months, appreciably higher than when I last wrote to you. That primarily reflects further pass through from recent increases in world commodity and energy prices."

However, he then explained that inflation was equally likely to be above or below the target two or three years away, crucially, “under the assumption that Bank Rate increases in line with market expectations”.

Economists said this key phrase meant that Mr King had backed market predictions that interest rates would rise on three occasions before the end of the year.

Philip Rush, economist at Nomura. He said Mr King’s letter saw the governor “come as close as he can to support market rate expectations” without explicitly giving away the Bank's plans.

Michael Saunders, the respected economist at Citigroup, said: "This in effect is an endorsement of the market rate profile – which projects three hikes by year end– as a roughly appropriate path for policy."

An increase in interest rates would cause further problems for the already slow mortgage market. An increase to 1.25 per cent would add £54 to the average first time buyer's monthly mortgage payments, taking them up to £722 per month, according to Capital Economics, the think tank. It said: "For new borrowers who are already being asked to stump up historically high deposits, that is not a trivial amount."

High inflation is bad news too for most families, whose average wages are not keeping track with the increases in the cost of living. The Office for Budget Responsibility has forecast that average earnings this year will increase by just 2.2 per cent, followed by an increase of 2.4 per cent in 2012, raising the prospect that workers will suffer from effective wage cuts for the next two years.

Ann Robinson, the director of Consumer Policy at uSwitch.com, a price comparison site, said: “Consumers are facing a perfect storm that could see household finances knocked for six this year. When salaries fail to keep up with inflation it spells misery for consumers. These figures could be a cruel and costly combination for households, many of whom are already struggling to stay afloat in these stormy economic times."

The Retail Prices Index, a measure of inflation that many believe more accurately reflects the true cost of living because it contains housing costs, increased from 4.8 per cent to 5.1 per cent. The RPI is often used by companies and trade unions to negotiate salaries. At 5.1 per cent it is now 3 percentage points higher than national average wage increases.

Many households have already felt the full effects of inflation when they come to fill up their cars at the petrol pumps, with the price of petrol hitting a fresh high almost every day in January, because of the rising price of oil and higher fuel duty.

Beer, too, has shot higher in price, with the average pint of lager climbing the £3 barrier for the first time. Publicans warned it would increase even more after the Budget next month when an inflation-busting duty increase is expected to add a further 10p to the price for pint.

Many claimed that elderly people, especially those who relied on their savings as a key source of income, were the hardest hit.

Basic rate taxpayer with £10,000 in instant access savings account, which now pays an average of just 0.67 per cent, earns £53.60 a year net, but effectively loses £400 once inflation is taken into account. It produces a total net loss of £346.40 in a year in real terms.

For a higher rate taxpayer, the net loss in real terms is equivalent to £359.80, according to the calculations by personal finance website Moneynet.

Ros Altmann, director general of Saga, said: "This latest surge in the CPI is a further kick in teeth for older people who often live on fixed incomes and who rely on their savings for additional income. If the Bank of England needed further evidence of the need to increase interest rates sooner rather than later, it surely now has it.

"The retired population spends more of its income on food and transportation costs, which has been a big contributor to the inflation increase and their spending power is being severely squeezed."

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seriously, whats there to fear with interest rates at 1.25pc?

anyone who's pushed over the edge and can't afford to keep up with mortgage repayments shouldn't have overstretched to take out a mortgage in the first place. 1.25pc is still historically very low!!

but then again, since base rates don't mean jack sh1t when it comes to the banks, for every 0.25pc rate, expect them to hike 0.5pc!....

....and they'll shaft the savers by giving them a big fat zero rate increase!

long live the investment bw@nkers!

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I still think 1, 2% is puny compared to previous 5% rates. If you didn't budget for this then tough, you're a bit dim. Weed out the chaff.

In any case, this is good news for my NS&I index-linked certs, at least.

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However, he then explained that inflation was equally likely to be above or below the target two or three years away, crucially, “under the assumption that Bank Rate increases in line with market expectations”.

That means precisely nothing. As I'm sure Merv intended. Silly article.

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I still think 1, 2% is puny compared to previous 5% rates. If you didn't budget for this then tough, you're a bit dim. Weed out the chaff.

In any case, this is good news for my NS&I index-linked certs, at least.

5%!! PAH! First house in 1990 was with a helpful 12% interest rate! I can remember when they were 18% in 1979..

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5%!! PAH! First house in 1990 was with a helpful 12% interest rate! I can remember when they were 18% in 1979..

Yes but I suspect you hadn't borrowed twelve times your annual salary with little prospects for wage increases.

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I still think 1, 2% is puny compared to previous 5% rates.

Unless you've mortgaged in the last 3 years and you're on 3.5% over base then you're going to be on 5%.. and then some when it goes up further.

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5%!! PAH! First house in 1990 was with a helpful 12% interest rate! I can remember when they were 18% in 1979..

I think it was 15% in 1979 not 18% miras bought it down to 12% .

To compensate there was a nice 20-25% pay rise in 1980 and rises in the 10% range for most of the 80's . Big mortgages got small very quickly it was only the first few years that you had to struggle.

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Unless you've mortgaged in the last 3 years and you're on 3.5% over base then you're going to be on 5%.. and then some when it goes up further.

I'm on nearly 6% but I locked in for several years.

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but giving some hope to hard-pressed savers.

To lend savers money to borrowers an IR of 3% to the savers would be fair.

Then take £1 trillion @ 3% and you will see the amount they have been robbed of,( is there any bright spark can convert this into an actual amount :) ) but hey at least the Banks have been able to put that windfall into their coffers.

With IRs at 0.5% and mortgages averaging 4%, personal loans averaging 12%, overdrafts averaging 15%, and CCs averaging 23% you can see where those bonuses are coming from. ;)

As always shown by past history the prudent take the flack in a financial crisis while the irresponsible laugh at the mugs who lent them the money probably knowing they would not repay their debt by taking the route to bankruptcy.

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Guest The Relaxation Suite

words, words, words

Telegraph link

Any rise in interest rates would end nearly two years of stability with record low interest rates of 0.5 per cent, hitting the majority of mortgage holders, but giving some hope to hard-pressed savers.

Leading economists seized on a key passage in the governor's letter to George Osborne, the Chancellor, explaining why inflation was above target for the 13th consecutive month. They said Mr King's words were a clear signal that interest rates could rise three times before the end of the year, to hit 1.25 per cent.

The official data revealed that inflation, as measured by the Consumer Prices Index, climbed from 3.7 per cent in December last year to 4 per cent in January, the highest level for over two years. The surging price of oil, petrol and the increase in the rate of VAT, which pushed up the price of alcohol and restaurant meals, were the main reasons for the jump.

Mr King warned that the immediate outlook was one of continuing rise in prices, because of the high price of oil, wheat, copper and other commodities on the global markets.

Mr King said: "Inflation is likely to continue to pick up to somewhere between 4 per cent and 5 per cent over the next few months, appreciably higher than when I last wrote to you. That primarily reflects further pass through from recent increases in world commodity and energy prices."

However, he then explained that inflation was equally likely to be above or below the target two or three years away, crucially, “under the assumption that Bank Rate increases in line with market expectations”.

Economists said this key phrase meant that Mr King had backed market predictions that interest rates would rise on three occasions before the end of the year.

Philip Rush, economist at Nomura. He said Mr King’s letter saw the governor “come as close as he can to support market rate expectations” without explicitly giving away the Bank's plans.

Michael Saunders, the respected economist at Citigroup, said: "This in effect is an endorsement of the market rate profile – which projects three hikes by year end– as a roughly appropriate path for policy."

An increase in interest rates would cause further problems for the already slow mortgage market. An increase to 1.25 per cent would add £54 to the average first time buyer's monthly mortgage payments, taking them up to £722 per month, according to Capital Economics, the think tank. It said: "For new borrowers who are already being asked to stump up historically high deposits, that is not a trivial amount."

High inflation is bad news too for most families, whose average wages are not keeping track with the increases in the cost of living. The Office for Budget Responsibility has forecast that average earnings this year will increase by just 2.2 per cent, followed by an increase of 2.4 per cent in 2012, raising the prospect that workers will suffer from effective wage cuts for the next two years.

Ann Robinson, the director of Consumer Policy at uSwitch.com, a price comparison site, said: “Consumers are facing a perfect storm that could see household finances knocked for six this year. When salaries fail to keep up with inflation it spells misery for consumers. These figures could be a cruel and costly combination for households, many of whom are already struggling to stay afloat in these stormy economic times."

The Retail Prices Index, a measure of inflation that many believe more accurately reflects the true cost of living because it contains housing costs, increased from 4.8 per cent to 5.1 per cent. The RPI is often used by companies and trade unions to negotiate salaries. At 5.1 per cent it is now 3 percentage points higher than national average wage increases.

Many households have already felt the full effects of inflation when they come to fill up their cars at the petrol pumps, with the price of petrol hitting a fresh high almost every day in January, because of the rising price of oil and higher fuel duty.

Beer, too, has shot higher in price, with the average pint of lager climbing the £3 barrier for the first time. Publicans warned it would increase even more after the Budget next month when an inflation-busting duty increase is expected to add a further 10p to the price for pint.

Many claimed that elderly people, especially those who relied on their savings as a key source of income, were the hardest hit.

Basic rate taxpayer with £10,000 in instant access savings account, which now pays an average of just 0.67 per cent, earns £53.60 a year net, but effectively loses £400 once inflation is taken into account. It produces a total net loss of £346.40 in a year in real terms.

For a higher rate taxpayer, the net loss in real terms is equivalent to £359.80, according to the calculations by personal finance website Moneynet.

Ros Altmann, director general of Saga, said: "This latest surge in the CPI is a further kick in teeth for older people who often live on fixed incomes and who rely on their savings for additional income. If the Bank of England needed further evidence of the need to increase interest rates sooner rather than later, it surely now has it.

"The retired population spends more of its income on food and transportation costs, which has been a big contributor to the inflation increase and their spending power is being severely squeezed."

You'd need at least 5% rates absolute minimum before you'd notice anything in the housing market. Probably more like 6% or 7% IMO. And sustained as well.

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Mr King said: "Inflation is likely to continue to pick up to somewhere between 4 per cent and 5 per cent over the next few months..

HOW MUCH?!! HOW MUCH?!! :o :o

Edited by billybong

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Load of balls.

He adopts the same tactic as his opposite number at the FED.

Talks tough on inflation, and maintains the "Strong Dollar Policy", while at the same time manning the printing presses!

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Ok my take on it is he he correct for this year. Between Jan 2012 - Aug 2012 we will see 3 more rise to make it 2%. I can then see this staying flat for around 9 months before dipping.

Anything above this I think we will see real issues which will affect far more than house prices

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You'd need at least 5% rates absolute minimum before you'd notice anything in the housing market. Probably more like 6% or 7% IMO. And sustained as well.

Rate rise threat for 3m home owners

Almost three million homeowners would struggle to pay their mortgage if interest rates rose by just 2 percentage points, according to new industry figures seen by The Sunday Telegraph. This equates to more than one in three (37pc) of all mortgage holders.

OK so this is referring to base rates at the lofty heights of 2.5% but 1.25% would still would do some damage I'd say especially on top of inflation and with little in the way of wage inflation to offset.

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1.25 percent is indeed a piddly figure. I thought they have to put them up so interest rates make the pound look attractive?

It will break plenty.

Ive heard the possibility of 3% being described as savage and brutal.

Lets get this party started.

First bit of Newsnight tonight was great.

Any reticence on Camerons part to raise rates is now entirely political.

He knows how stupidly, religously, hotwired most people are to the IR in this country.

And just as importantly for Cameron, Balls knows it too.

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you have to remember that interest rates are currently 0.5%. most svr rates are between 3.5-4.5%

a rise in base rates to 1.25% will push some SVR's up to nearly 6%

if interest rates reach 2-3% some varaible rates will be pushed towards 7.5%.

Edited by mfp123

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you have to remember that interest rates are currently 0.5%. mot svr rates are between 3.5-4.5%

a rise in base rates to 1.25% will push some SVR's up to nearly 6%

if interest rates reach 2-3% some varaible rates will be pushed towards 7.5%.

I bet savings rates won't rise as fast

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The bigger the loan, the smaller the interest rate movement it takes to push a borrower into the danger zone

interestrates.jpg

Not always as both loans go up by the same % . It depends how near the danger zone each person is already the bigger loan might be backed by a much bigger salary than the smaller one.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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