Variable or Fixed Rate? (Feb 2011)

The rate you are currently paying will have the biggest impact on this decision. Furthermore, how quickly interest rates rise and the level they reach must also be determined - this is very subjective and falls squarely in crystall ball teritory. We tend to give our thoughts on interest rate movements every month in our newsletter but we can never know for sure what will happen with interest rates in the future.

The case for higher rates

Inflation is running higher than the Bank of England would like (their target is 2%). If they raise interest rates then it has two major effects; 1. It slows spending. Less demand reduces prices; 2. It strengthens Sterling, so imports become cheaper. Since we import more than we export this automatically reduces prices. Since food, clothing and fuel are major imports the effect of a stronger £ is quite significant on inflation. 

The case for much of the same or lower rates

At 0.5% there is no scope for interest rates to fall. Will they stay as they are? Let's not forget that we have witnessed the biggest recession since the 1930's and the public sector is shrinking due to Government spending cuts. We actually need people to spend so that we can pull ourselves out of recession; increasing interest rates won't help.

What happens to all the lost public sector jobs? The Governement wants the private sector to take these up but the only sector making any gains is manufacturing and this is through a rising export market; remeber how weak Sterling makes goods more expensive to us, well it makes our product cheaper overseas, so we export more. Increasing interest rates will make our goods more expensive abroad and will slow our manufacturing.

Let's not forget how much personal debt we have through loans and mortgages. Higher interest rates will increase household expenses and slam the brakes on spending - another recession could soon follow.

We believe that interest rates may have to rise modestly, maybe by up to 1% over the course of 2011\2012. Eventually, rates will return to their historical average of about 5% but this could be 3-5 years away. So, in the short term you might want to fix if you're on an variable rate of 3% or above. If you're lucky enough to have a base rtae tracker then you might only be paying about 1.5%-2% in which case it might be better to stick with what you have. Whatever your situation, let us review your current situation and we will prsent you with your options.