Mortgage Advice

Forecast for UK Interest Rates

With the US economy heading towards recession, it is likely that this year will see a cut in UK interest rates.

As a general rule, UK interest rates often follow closely US interest rates. There is not a perfect correlation but often the trade cycle of the US and UK converge.

This week the Fed cut interest rates by 0.75% in response to concerns over a falling stock market and a weak housing market. It is likely that the MPC will soon follow suit, although the MPC will be more cautious about cutting interest rates by a large amount. In recent years they have always sort to change rates by 0.25% at a time.

In the medium term, after many years of growth, the UK economy may slow down. The main reason for this is that the Housing Market is likely to slow down. Falling house prices would have a significant negative impact on the UK economy; it would reduce consumer confidence and reduce spending. Lower spending would reduce inflationary pressures, enabling the MPC to cut mortgage interest rates, without CPI inflation going over the governments inflation target.

Another factor that may contribute to lower interest rates in 2008 and 2009 is the global credit crunch. This is making it more difficult to borrow money, therefore lending, such as mortgage lending, may well contract causing lower growth.

It was interesting to note that the last 0.25% cut by the MPC did not translate into lower mortgage payments for many homeowners.

See also:

• Economic Forecasts