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23rd March 2007 Homeowners are we due another interest rate rise. Every UK Homeowner and mortgage holder is keen to know about interest rates. With house prices at all time high many people have had to  extended themselves by borrowing larger sums of money and thus any upward change in interest rate can prove a little worrying. But why do interest rates change and how is it linked with inflation?   Uk Interest rates are set by the Bank of England and one of the banks core objects is to keep inflation low, it helps to achieve this by increasing interest rates if it feels necessary. There is a direct correlation between the money that we spend and inflation and thus when interest rates are higher, we have less money to spend, this in turn helps to keep inflation in check. A stable rate of inflation means that prices should not fluctuate greatly and there is confidence in the economy. Well that all sound s very good in theory but in practice it is a lot more complicated.    There are some 11 million mortgage holders in the United Kingdom and the whispers of another hike in interest rates will not go away. Recent reports suggest that inflation has just hit 4.6% which is the highest for 15 years and this may force the Bank of England to raise interest rates again in the next couple of weeks This coupled with the data   that in February, consumer spending rose by the highest amount for two years is surely likely to spur the monetary committee in to action.  Interest rates already at a 5 year high are predicted to rise by another 0.25%. With interest rates at the highest level for 5 years, many homeowners in the Uk feel we have been duped in to accepting a booming housing market by a monetary policy designed to ward off recession, maybe this is the case but their is no doubt that soaring house prices have led to a high degree of personal debt and the office for National Statistics says confirms that mortgage interest payments are the main reason inflation is going up, although the government chooses to use a different index that excludes housing costs.   Rising house prices are being fuelled by the  worry of many first time borrowers that if they do not buy now, they will never get on the market. At the present moment £1 billion a day is being lent and large of amounts of personal debt are being taken on over longer periods of time.  The secondary factor  affecting the Uk market is the number of people borrowing funds for buy to let properties. Buying property to finance retirement is very popular as many people have lost faith in the equity markets and pension funds. If inflation is to be kept in check, then it is inevitable that interest rates will have to rise again but perhaps the time is fast approaching to look at the long term picture. Should steps be taken to limit the amount of credit that is freely available in the United Kingdom and perhaps it is time to re-establish the pension and equity markets as a reliable means of saving for retirement.                                   back to top   Copyright Assetsure Limited 2007