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Low mortgage rates for a year but King warns of slow recovery
Hugo Duncan and Jonathan Prynn13.05.09
Mortgage rates are set to stay low for at least another year after the Bank of England warned that the recession will be much deeper than expected.
Millions of homeowners on tracker loans that have fallen to historically low levels will continue to reap the benefit until the middle of 2010 at least, economists said.
The Bank said Gross Domestic Product would drop by 4.5 per cent at the worst point of the downturn and Governor Mervyn King cautioned that any recovery would be “slow and protracted”. The downbeat assessment, which follows weeks of growing City optimism, means the Bank's base rate will stay at or close to 0.5 per cent well into next year.
Howard Archer, chief UK and European economist at forecasters IHS Global Insight, said that while the recession was showing signs of bottoming out “we could well be in for a very bumpy period for some time to come. Bottom line: interest rates look poised to stay at 0.5 per cent”.
The Bank of England has hacked interest rates down from five per cent in October to their 315-year low in an attempt to revive the economy. About four million homeowners — 500,000 in London — on tracker deals that rise and fall in line with the base rate have seen their monthly mortgage payments drop spectacularly as a result. In the most extreme example, monthly bills for some Cheltenham & Gloucester borrowers dropped to just 1p.
The fall in the cost of borrowing is thought to have helped thousands of homeowners who have lost their jobs ride out the recession without having to go through the trauma of repossession. However, the prospect of interest rates staying at such meagre levels is bad news for savers. It means that most savings rates are doomed to stay at or below one per cent for many more months and possibly years.
Today's Bank of England inflation report painted a far gloomier picture of the economy than that outlined by Chancellor Alistair Darling in last month's Budget. Jonathan Loynes, chief European economist at Capital Economics, said: “The inflation report injects a sensible element of caution amidst recent excited talk of the green shoots of recovery.”
Inflation, currently at 2.9 per cent, will fall below the target rate of two per cent in the second half of this year and could stay below it for a further three years, the Bank indicated.
Mr King said the economy would probably recover early next year but also said that any recovery could be short-lived unless the flow of money around the economy increases significantly. “It would be extremely unwise for anyone to claim that they know what the future holds,” he said.
The Bank said the global economy has deteriorated in recent months and said the recession would be deeper and longer than it thought when it published its previous inflation report in February.
Reader views (9)
Buying property when interest rates are so low, regardless house prices are falling, is dangerous territory and an econominist will tell you that if they had the guts.
250 grand house on interest rates of 2.5% is great - what happens when interest rates go back to 5 or
even 7%??
Here in London, every day I hear of more people facing redundancy. Hear of more and more people falling into debit - they can't no longer free up capital on thier properties to fund the lifestyles they once had.
For years I felt a failure as all those around me seemed to be doing so well - have more free cash than me. I now know why!! Credit cards and remorgaging due to the vast increase in their property prices.
Lets just hope after this nasty downturn people return to some sense. Your health, mentality and family are the most important things in life and bricks and mortar can never replace them - who can take their house to the grave with them?????????????????
- Tm, LONDON
Grim news for savers?!
Can we have some more intelligent reporting than "high interest rates" = good for savers, low interest rates = bad.
This is grim news for those who lose their jobs. We are supposed to worry about those in work with savings losing out on a bit of unearned income?!
Yes, this is bad for those living off interest, but anyone whose savings are sufficient to live off the interest is hardly hard up!
I thought the ES was trying to relaunch and put this lazy journalism behind them.
- Da, United Kingdom
Low interest mortgage rates for at least another year. Good. Has to be good news for
us as we are paying the mortgages of so many 'snouts in the trough' MPs. Even
better news if the guilty MP 'flippers' were kicked out of Parliament and found themselves in negative equity. Even better if they found themselves in jail for fraud.
- Pam Read, London UK
Low interest mortgage rates for at least another year. Good. Has to be good news for
us as we are paying the mortgages of so many 'snouts in the trough' MPs. Even
better news if the guilty MP 'flippers' were kicked out of Parliament and found themselves in negative equity. Even better if they found themselves in jail for fraud.
- Pam Read, London UK
Dizzy Darling said recently that the recovery of the economy will happen sooner than later.
Now King says that the light at the end of the tunnel is getting further away.
Is it any wonder Joe Public is totally fed up with banks, MP's, Lords, NHS and schools fiddles?
- Reuben Camara, Morecambe/Lancaster
Everytime King opens his mouth the markets take a hit,but the economy has a bouyancy and tries to regain again.Only Darling comes close to King in his ability to talk down the pound.Do you think they are competing.....well they have to be good at something?
- Tithonus, london
A slow level of recovery for us mere mortals, while our esteemed leaders take their heads out of the trough of plenty to throw a few cheques and the baying mob, only to dive back in I'm sure. Recession? What recession?
- Goggs, London
Goodbye UK
Not everyone owns a house in the country of their birth and because of this goverment's personal greed ( they own several each) they are collapsing the pound to support it
- Philip Wildsmith, Moscow russia
Good News Mervyn; If I buy a house now with the low interest rates; will they stay low for the next 25 years?
Or will you stuff me again next year?
- Mickyinlondon, london
