Maradona’ unlikely to stop rates rising

It now seems certain that the Bank of England’s Monetary Policy Committee (MPC) will deliver a 0.25% increase on Bank Base Rate (BBR) when they meet on Thursday and some market commentators are even alluding to an increase of up to 0.50%.

However, if we remember that Mervyn King, the Governor of the Bank of England (B of E) once referred to Diego Maradona’s legendary second goal against England in the 1986 World Cup. King noted that Maradona ran virtually straight towards the goal and it was the England defenders’ expectation that he would change direction, following a number of body swerves by Maradona, that allowed him to run in a straight line.

What do we learn from this analogy? Well, if the B of E suggests that interest rates may have to rise to bring inflation pressure in under control, market expectations will increase swap rates, forcing lenders to increase their fixed rates and result in the consumer paying more for their mortgage and manage consumer demand. As a consequence, the end result is achieved by controlling expectation and without any real change in path, just as it was for Maradona in 1986.

The reality is, with 2-year swap rates currently running at around 6.00%, the market fully expects an interest rate increase and Mervyn King has recently had to write to the Chancellor to explain why inflation has increased above 3%. Even though some market commentators believe that the three interest rate increases since August last year are beginning to bite, it seems highly unlikely the MPC will rely on the ‘Maradona effect’ on Thursday and shock the market.

Karen Wint, Head of Marketing & PR said, "All the signs are that there is no bluff going on here and there will be an increase of 0.25% on Thursday. Market rates are currently running at such a level that any increase has already been factored in.

"Clearly it is investors who benefit in a rising rate environment and this climate has enabled us to launch a market leading 2-Year Fixed Rate Bond paying 6.20% AER until 30 June 2009, with instant access to up to 25% of the funds without notice or penalty, at any time.

"We have recently seen an increase in the number of fixed rate mortgages being taken out and many homeowners are looking to protect themselves against any future interest rate increases. Fixing brings the obvious benefit of certainty of payments and the ability to budget. Variable rate mortgage customers may see their monthly payments increase in the short term but if, as some commentators believe, we have reached the top of this interest rate cycle, then they will see payments stabilise and even come down in the future."