Interest Rates May Not Rise After All
Lower than expected price rises reduce the chance of a further interest rate increase in the near future.
Until today, a further rise in the Bank of England's base rate looked close to a sure thing.After all, the Bank's governor, Mervyn King, said last week that consumer spending and total demand would have to fall further if inflation were to hit the target rate of 2% in two years' time.And the main weapon the Bank has to reduce consumer spending is increasing the base rate. (If the base rate rises, lenders are pretty much forced to increase the rates for variable-rate mortgages. Higher mortgage rates mean that consumers have less to spend on goods and services. As demand falls, price rises normally slow down, because businesses can no longer push through big price increases without losing custom.)However, the picture changed today as The Office for National Statistics (ONS) released surprisingly low inflation numbers for last month.Consumer prices only rose 1.9% compared to a year earlier, down from 2.4% in June. That's a much bigger fall than expected as economists had thought inflation would fall to 2.3% in July, according to a survey published by Bloomberg News. The slowdown appears to have been caused primarily by a supermarket price war and falling utility prices.House pricesSome interesting house price statistics have also been published today. RICS (The Royal Institute of Chartered Surveyors) revealed that the number of estate agents and surveyors expecting house prices to fall over the next three months outnumbered those forecasting gains by 9%. The difference between optimists and pessimists was just 0.7% in June.You'd expect estate agents to be well-informed about the current state of the housing market, so maybe the house-price bonanza of the last few years is finally coming to an end.Admittedly, house prices aren't included in the Bank's target inflation number -- the CPI (Consumer Prices Index) -- but higher house prices give consumers the confidence to spend in the shops. That means the state of the housing market should affect the Bank's decisions on the base rate.So what?If inflation is falling, the Bank may not feel the need to increase the base rate further, which would be good news for those of us with mortgages or other loans.However, I can't guarantee there won't be further interest-rate rises this year. Next month's inflation numbers may not be so rosy, especially if the oil price continues to rise. Or this month's inflation figures could be revised upwards when further information comes through (this happens frequently.)And even if the inflation figures continue to stay low, Mervyn King and his fellow members of the Monetary Policy Committee (MPC) could still decide to err on the side of caution and go for a higher base rate regardless.Still, the chances of a base rate rise in the next couple of months have fallen. You can no longer assume that your savings account will be paying you more interest in November than it is now.More: House Prices Start To Fall In London | Base Rate Rises To 5.75%