Interest rates in the UK look set to drop to 5 per cent by next summer and once there should remain steady until the end of the year, according to analysts.
But despite this fall it seems that 2008 will be a difficult year for mortgage holders and a relatively good one for savers.
Interest rates rose three times in 2007, peaking at 5.75 per cent. But on December 4, the Bank of England made its first cut to the base rate in two years – taking the interest rate down by a quarter percentage point to 5.5 per cent.
The medium economic outlook is being threatened by the difficulties faced by households and businesses to obtain credit.
The Bank says it is still concerned about rising inflation but made the cut in an attempt to relieve the pressures that have arisen from the credit squeeze.
Investors and economists are predicting that 2008 will herald further reductions in the interest rate – with many expecting that by next summer the rate will be 5 per cent. Some even say interest rates could fall to 4.75 per cent.
Economists for Citi Investment Research predict a cut of 50 basis points in 2008. and say futures market expectations have come down.
“It seems clear that the Bank of England now expects a sharper slowdown than it indicated in the November inflation report,” says Richard Dingwall-Smith, chief economist at Scottish Widows Investment Partnership. “By implication, interest rates are likely to fall faster and further than the gradual move down to 5.25 per cent by late 2008 assumed in that report.”
News that the Bank of England’s entire monetary committee voted for the last interest rate cut makes it more likely that another rate reduction will follow on swiftly, say analysts.
Ray Boulger, senior technical manager at John Charcol, believes there is a 50/50 chance of another rate cut as soon as January and says that the base rate could be down to 5 per cent by March or April.
But personal finance experts warn that rate cuts will probably not be passed on to mortgage customers.
The reason for this is that the bank rate no longer defines all mortgage interest rates, says Peter Williams, executive director at the Intermediary Mortgage Lenders Association.
“Since the credit crunch lenders have had to pay more to raise money and the consequence is that they are not passing on interest rate falls to consumers and are having to tighten lending criteria,” he says.
Borrowers could see slightly reduced mortgage rates but the ones who will really benefit are those on tracker mortgages who will see an instant reduction in their rates, according to Richard Mason, managing director of comparison site moneysupermarket.com.
There could also be an increase in the number of mortgages offered with good fixed rates but very high arrangement fees, says Mike Naylor at uSwitch.
This means, he says, that borrowers will have to get their calculators out to make sure they are getting a good deal when arranging a mortgage.
On a less gloomy note savers should still be able to find some good offers next year, as banks continue to try raising cash by pulling in funds from savers. A reduction in interest rates will not affect their reasons for setting up attractive savings products in the first place. “If the interest rate falls, savings rates will invariably come down, but only slightly,” says Mason.
Ross Dalzell, savings marketing manager for Alliance & Leicester, says: “There has been increased competition across the savings market. Savings rates could be 1 or 2 per cent above the base rate next year.”
We have probably seen the best of the savings rates, but they will still stay high in comparison with the base rate, thinks Boulger. But for savers prepared to tie up their money, he says there are strong incentives for putting cash into long-term accounts.
Julia Harris at Moneyfacts.co.uk says short-term fixed rate bonds look set to offer good value for savers next year. Top rates have already increased from 6.05 per cent to 6.8 per cent for three months bonds, and the number of products available has boomed. She does not expect a dip in interest rates to significantly affect these product offers.
The one area that has so far seemed immune to the raft of attractive savings rates is Isas. But 2008 is likely to change all that, say analysts. “I expect to see more competition for Isas next year,” says Dalzell. “And I think consumers can expect to see many more Isa products out in the first quarter of the year.”
