By UK Property Investment Expert Andy Shaw...

Is There Going To Be An Interest Rate Cut?

In April 1995, after just finishing lunch at my parents, my Mum and I started discussing politics and the economic state of the country.

I said Labour would win the next 2 elections with landslides and that the only way the conservatives would stand a chance in the third would be if they had a charismatic leader.

When I was explaining to my Mum how I believed that while this was all going on we would be benefiting from a house price boom that was going to be sustained by some of the all time lowest interest rates. I made a mad prediction that interest rates would fall to 3% in 2003.

Its easy for me to write this down now as all of this stuff has already happened, yes I wasn’t completely right on the level of interest rates but you get the idea, I was in the ball park. I think at the time they were around 8% but that’s just a guess.

At the end of 2003 when the Bank of England started to raise interest rates I wasn’t unduly bothered, as I believed rates should have been at 4-4.25% anyway and there short term fall to 3.5% was an unsustainable effort to match Europe amongst other things.

They raised it they said because they were trying to kerb house price inflation. In my opinion it was still rising but was due to slow anyway in 2004, as it experienced massive growth correcting it in the previous years.

Of course I believe this was only a correction bringing house prices back to where they should be. The fact that at the moment in some areas of the country there is no growth is a good thing for the property investors who only shop for hotspots.

I have already made it clear in previous articles that house prices go up at an almost constant rate, but what the interest rate rises have done or appear to have done in some areas, is slow or bring to a halt the market. So in those areas where the market stopped in September 2004 and will start rising again in May 2006. It will mean the market has stood still for 20 months where it should have been growing at 11.224% / year.

So I predict that in 2006 some areas will have 20% house price rises - is that such a surprise? Of course this doesn’t include the SIPPS issue and it doesn’t include whether the individual markets are correctly valued at the moment! But I made my opinion of the current value of the market known in a previous article.

Anyway I digress let’s get back to interest rates. When they raised rates at the beginning of 2004 again I was ok with this, but the following month they raised them again and this was too soon. A rate rise or a rate cut can take several months to take effect and give the correct indicators (if not years) so I thought this was fool hardy and was worried rates could rise to 5-5.5% if they were going to continue with this attitude.

Well they continued to raise them very quickly to their current level, but luckily they stopped raising them before killing off the economy. In January 2005 I predicted that rates would end the year at their correct level of 4.25%. I felt sure that we would get our first rate cut in April or May and a second cut in September or October.

For the last 2 months I have been saying ‘they’ll be coming down this month’ and they haven’t! In my opinion my prediction of 4.25% by the end of the year will come true and in my opinion the first cut will be next month, but I have been saying that for the last 2 months. What amazes me is the speed at which they raised it when the indicators for a rise were not that strong but now the indicators are crying out for a cut they hesitate to lower the rates. I think a lot of this is because they themselves find it difficult to believe that interest rates should be this low as historically they haven’t been, well guess what the world has changed!

If you like a little gamble, then this is the month 4 out of the 9 people who decide the interest rates, last month voted for a rate cut.

That's just my opinion of course!

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