Expect interest rate rise by Christmas, households told
New York (June 15) Financial markets have raced to price in a UK interest rate rise by the end of the year following the clearest indication yet from the Bank of England that it is close to calling time on the era of record low borrowing costs.
Households and business owners were warned to prepare for rates to rise as soon as November from 0.5%, where they have been for more than five years.
Comments by Bank governor Mark Carney on Thursday that rates could increase sooner than markets thought prompted financial players to bring forward their bets for a hike to Christmas rather than in 2015, prompting sharp movements in interest rate futures.
The pound also jumped to a five-year high against a basket of currencies, shares in housebuilders slumped and retail stocks were hurt by the prospect of fresh pressure on already squeezed households.
Until this week Carney had repeatedly emphasised that he and his colleagues on the monetary policy committee (MPC) were in no rush to go back to increases. Carney's change of tune was taken as a sign that some MPC members were pushing for borrowing costs to rise and analysts will be scouring minutes released next week from the latest MPC meeting.
A Reuters poll of economists taken after Carney's speech showed they now saw a rate hike as likely in the first quarter of 2015, compared with a forecast for a second-quarter hike in a poll just two weeks earlier.
But the Bank has said that when rates do rise it will be gradually, and in the poll economists said they only saw rates reaching 1.5% by the end of 2015.
The talk of higher rates was welcomed by savers and those economists who argue that the solid pace of economic growth no longer justifies crisis-level borrowing costs. But business groups urged the Bank to be careful not to derail the recovery and there were warnings that households could get into financial difficulty.
Matthew Whittaker , chief economist at the thinktank Resolution Foundation , noted that there were already 1.1 million mortgage holders saddled with repayments they could barely afford.
"The scale of mortgage debt is still substantial, even after years of economic downturn, and it could start to look precarious for many households," he said.
John Cridland , director-general of business lobby group the CBI said: "With the economic recovery firming up nicely, any change in monetary policy should ensure this isn't blown off course."
Carney's speech came alongside the move by the chancellor, George Osborne , to give the Bank more powers to rein in mortgage lending and take the heat out of the housing market.
Meanwhile, the ratings agency Fitch joined the chorus of warnings about Britain's housing market as it kept the UK one notch below the top credit score. Maintaining its AA+ rating for the UK , Fitch highlighted the recent rapid rise in the house price-to-income ratio, in particular in London . There was more upbeat news from Standard and Poor's, however. The only one of the three big agencies to rate the UK at the top AAA level revised its credit outlook for the country to "stable" from "negative" yesterday, citing a broadening economic recovery and "further progress in consolidating public finances".
Source: KITCO
