LONDON, UNITED KINGDOM (July 2010) – The Ernst & Young ITEM Club, which bases its forecasts on the Treasury's own model of the economy, said on Monday that the Bank of England's base rate will remain on hold until 2014 in order to offset the coalition government’s ambitious austerity measures.
The ITEM Club’s latest report echoes the sentiment of both the Centre for Economics and Business Research (CEBR) as well as the British Chambers of Commerce (BCC). The CEBR predicts no rise in interest rate for at least 18 months, while the BBC says rates will be on hold until at least May 2011. Only a third of economists now expect a rate hike in 2010, according to a recent poll by Reuters.
“Our South African clients will welcome the news that while there seems to be no further rate cuts on the cards for their SA property portfolios, they are likely to enjoy historically low rates on their London properties for some time to come.” So said Mike Smuts, managing director of Smuts & Taylor, a South African investment firm based in London.
UK property investors have now enjoyed the benefits of a 0.5% base rate since March 2009 with most paying a mere 2.5% interest on their investment mortgages. This along with some good growth in the private rental sector has led to some substantial gains from rental income.
Rates are controlled by The Bank of England's Monetary Policy Committee who is tasked by the government to keep inflation below 2% and above 1%, looking two years ahead. There have been concerns over the high rate of UK inflation lately, with some economists calling for a rise in interest rates to stop it from getting out of control.
UK inflation was above forecast for several months and hit 3.7% in April but the Bank confirmed in its quarterly inflation report (12 May) that it expects inflation to remain below the 2% target in two years time and the CPI rate has continued to fall (down to 3.2% in June). So in theory, no rate rises are needed in the near-term.
The Item Club report confirms this. It said high energy prices and the increase in VAT will keep inflation above target over the next 18 months, but added that it will move below 2% as those effects wear off and spare capacity bears down on pricing decisions. It also believes that while the coalition-government's package of spending cuts and tax hikes will slow economic growth over the next two years, it will ultimately make the recovery more sustainable.
Mike Smuts agrees adding; “While there has been much talk about a hike in interest rates to control inflation, we need to remember that considering the level of government debt, the reverse would be a nightmare scenario as deflation effectively makes debts grow. So it’s likely that while the economic recovery is fragile, rates will remain low. That said you shouldn't entirely put your trust in any predictions, including those made by leading economists. At the end of the day, your financial decisions should be based on protecting your finances as best you can rather than trying to predict the future. Analyze every investment based on its own merits and don’t under any circumstances buy property that doesn’t put cash in your pocket every month.”
