Mixed reaction to interest rates rise

5th August 2006

Financial analysts and industry leaders have given a mixed reaction to the Bank of England’s surprise hike in interest rates. The Bank says concern over inflationary pressures prompted it to change its base rate for the first time in a year – by 0.25% to 4.75%.

Many economists have welcomed the decision, calling it a “pre-emptive move” which may prevent the need for further rate rises later in the year. The Council of Mortgage Lenders, whose members are banks and other lenders, said the increase should limit the extent to which rate rises are needed in the future.

The CML’s Bob Pannell said: “Sentiment in the mortgage market is closely linked to interest rates, so in the coming months there is likely to be some moderation in the recent record levels of mortgage lending.” His view was backed by the lender Bradford & Bingley, which said: “We don’t think this is the beginning of a number of rate rises. We expect demand for mortgages to continue at the same level we have seen at the beginning of this year.”

However, others involved with the housing market reacted angrily to the hike. David Newnes, who’s managing director of Your Move estate agents, said the rise was “totally unnecessary” – and could serve to slow down the housing market. He said the move would make it even harder for first-time buyers to get onto the property ladder. He added: “The 0.25% increase will put some potential buyers off making their purchasing decision, not just because of this rise, which in real terms is quite small, but because any rate rise knocks confidence.”

His concerns were echoed by David Bexon, the managing director of SmartNewHomes.com, who described the interest rates increase as “bad news”, which would shake consumer confidence in the market and make it harder for first-time buyers and young families to step onto or move up the property ladder.