UK rates forecast good & bad

There is good and bad news for South Africans owning or looking to buy property in the UK.

According to a leading group of economists, interest rates in Britain will have to stay at their record low of 0,5% for the next four years - much longer than previously expected.

The Ernst & Young ITEM Club, which bases its forecasts on the Treasury's own model of the economy, said on Monday that the Bank of England's base rate will remain on hold until 2014 in order to offset the coalition government’s ambitious austerity measures.

“Our South African clients will welcome the news that while there seem to be no further rate cuts on the cards for their SA property portfolios, they are likely to enjoy historically low rates on their London properties for some time to come,” said Mike Smuts, managing director of Smuts & Taylor, a South African investment firm based in London.

The ITEM Club’s latest report echoes the sentiment of both the Centre for Economics and Business Research (CEBR) as well as the British Chambers of Commerce (BCC). The CEBR predicts no rise in interest rate for at least 18 months, while the BBC says rates will be on hold until at least May 2011.

Only a third of economists now expect a rate hike in 2010, according to a recent poll by Reuters.

UK property investors have now enjoyed the benefits of a 0,5% base rate since March 2009 with most paying a mere 2,5% interest on their investment mortgages. “This along with some good growth in the private rental sector has led to some substantial gains from rental income.”

Rates are controlled by The Bank of England's Monetary Policy Committee who is tasked by the government to keep inflation below 2% and above 1%, looking two years ahead. There have been concerns over the high rate of UK inflation lately, with some economists calling for a rise in interest rates to stop it from getting out of control.

UK inflation was above forecast for several months and hit 3,7% in April, but the Bank confirmed in its quarterly inflation report (12 May) that it expects inflation to remain below the 2% target in two years time and the CPI rate has continued to fall (down to 3,2% in June). “So in theory, no rate rises are needed in the near-term,” says Smuts.

Jacques du Toit, property strategist at Absa, says the only real effect this scenario will have on South African investors is if they have mortgage loans in the UK. “Otherwise it will have little effect other than supporting demand for property and property finance in the UK, which may then support property prices over there.” - Eugene Brink

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