The Bank of England has warned of a number of risks to the UK economy next year, in comments that analysts have said point to lower interest rates.
In its quarterly Inflation Report, the Bank forecast the economy would slow in 2008 and inflation would accelerate. However, it added that even if interest rates fell by half a percentage point, it would still hit inflation targets.
Analysts said that this signals that interest rates should dip next year from their current level of 5.75 per cent.
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“Whether or not this will happen is almost anyones guess at present, but the minutes of this months meeting will be key in identifying the chances. If the vote was tight then there is clearly every chance that they may fall in December, but if it was still 8-1 in favour of a hold then I suspect that will filter through to December. We will just have to wait and see, said Drew Wotherspoon of John Charcol.
The Bank of England is attempting a dangerous juggling act with the UK economy. It is hoping that tighter credit conditions will encourage more people to save, which in turn will bear down on spending.
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It is also keeping its fingers crossed that higher oil and food prices, and more expensive gas bills will hold back wage growth and moderate consumer spending. Additionally, it is praying that lower house-price inflation and heightened uncertainty may dampen spending growth.
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David Kuo, Head of Personal Finance, said: “It expects the UK economy to slow and then recover, and for inflation to rise above the 2 per cent target in the short term, then ease back. Clearly, there were lots of ifs and buts in the Bank of Englands Christmas wish-list, but homeowners should not attempt to emulate the central banks juggling act.”
According to Kuo, homeowners on fixed-rate deals should try and overpay their loans. By overpaying just £20 a month on a 5.25 per cent fixed-rate deal, homeowners would not only slash £5,880 off every £100,000 borrowed, but also cut the time to repay the loan by almost two years.
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He said: “In uncertain economic times, you dont want to, like the Bank of England, have too many balls in the air at the same time. We dont even know if the central bank is juggling with balls it could be knives, or fire, or both!
So what product should you take?
As ever, the first decision you must make is whether you need the absolute security that a fixed rate provides.
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If you do, then Abbeys two-year fix and Nationwides five-year fix appear to be the current cream of the crop, according to Drew Wothersppon of John Charcol.
Both rates, however, are still above 5.5 per cent and there is currently much better value to be found in the tracker and discount markets, with rates starting at around 5.1 per cent.
Of course, these rates are already available now, even without a reduction in rates which we are expecting soon.
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“With many suggesting that interest rates will hit 5.25 per cent some time next year, the rate on John Charcols exclusive best buy two-year tracker will be 4.59 per cent, a whole 1 per cent better than the best current fixed rate,” Wotherspoon explained.
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