December saw inflation rates in the UK rise by an full percentage point, up from 1.9% in November to 2.9% in December. At the end of the month of December the UK government reverted the VAT rate from the interim reduced level of 15% back to the preceding 17.5% rate. A small rise in expenditure on the face of it, but over all, taking all VAT chargeable items into account, that shift together with the claims that many major shops quietly increased prices by more than the formal rise in VAT means that it is almost assured that prices have gone up further still in January.
So what level will that leave the January inflation figures showing? No doubt, at least 3.0%, potentially well over 3.0%.
Does this mean that UK inflation figures are charging away out of control and what does it indicate for the average person? Well, several large lending banks are having to put up their standard variable rate mortgage costs. Why is this the situation if interest rates are stable and their lowest on record? The answer is very easy. The banks must attract lots of new savers and in plenty of cases they can only draw them by offering decent savings interest rates. Savers carefully investing in accounts paying 0.5% are losing a small fortune when the inflation figure is racing towards the 3.0% mark. In real terms, they are in reality losing 2.5% of their hard earned investment by keeping their cash sheltered away in the bank.
As a result, these wary savers are having to look around warily and with promising government backed savings and recently rescued banks being able to afford to pay out higher interest rates, other banks must raise the cash to follow suit. And there is only one straight forward way of doing this – increasing the basic interest rates that they are charging their borrowers who have been the beneficiaries of unprecedented low rates for a long time.
This sudden and surprising rise in the standard variable rates along with the pound’s gradually promising recovery on the essential international money markets could just be the prompt that the controlling Bank of England’s monetary policy committee may see as the basis to start to raise the base rate bit by bit after months of stagnation. They may want to manage expenditure whilst having to shield the wealth of savers from losing out on their important investments. Their only tool for controlling this would be to increase the base rate gradually.
Certain observers think that the projected base rate raise must come at some point in the future and that if it is sooner rather than later, it could diminish the final hurt of the interest rises. They fear that if the interest rates are not raised in the near future, then they may have to raise a lot more in later months. Only time will tell.
Keith works for for CompareMortgageRates.co.uk where you can find plenty information about how to compare uk mortgages.
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