Bank piles on mortgage woes with further rate rise

Commenting on the widely anticipated quarter of a point increase in UK interest rates to 5.75%, the fifth such rise in the last year, Paul Niven Head of Asset Allocation at F&C said: "The move is no surprise and had been fully discounted by markets. Inflation readings have been persistently above target for over a year and the most recent inflation forecasts suggested that a further rise would be in the offing. "

Niven points out that the economic consensus ahead of the decision was almost universal in the expectation of a rise but that "looking forward, it appears that the market may be getting ahead of itself in the aggressive expectation that rates have a high probability of hitting 6.25% by the end of the year and staying there for the foreseeable future," said Niven.

"Interestingly," he notes, "the statement accompanying the hike does not make explicit reference to the consumer, which has shown some tentative signs of moderation, and instead focuses on a lack of spare capacity in the economy and upside pressures to inflation.

"Looking forward, with the Inflation Report due next month, the detail of the Bank's expectations here will be closely scrutinised.

"Equally as important, however, will be the upcoming data releases on consumer borrowing and spending patterns and housing market statistics which will help to shape market expectations over just how close to the peak in rates we really are. "

In conclusion Niven argues: "Those who took out two-year fixed mortgages in 2005 as rates fell to 4.5% will face a reset with interest payments as much as 40% higher than deals struck at the point when markets had been discounting an ongoing reduction in rates. While markets may be too bearish over the longer term level of UK rates, clearer signs of a moderation in economic activity are required to see sustained respite from the Bank's path of higher rates."