How does the unemployment rate affect interest rates and mortgages?

 

How does the unemployment rate affect interest rates and mortgages?

Well-done Mr. Carney for doing a volte-face and unhooking the commitment, made not six months ago, to link the unemployment rate to higher interest rates.  Clearly the economy is reviving much faster than anticipated (about two years or so ahead of time) and, as such, this give the flexibility to buy time.

Frankly, when Mark Carney made his predictions it appeared that he was following the American economic model since, hitherto, no one had linked unemployment and interest rates before in the UK.  The Bank of England (BOE) has always been pre-occupied with inflation.

The Government gave Mr. Carney a wider brief than just inflation and, by doing so, the BOE can take into consideration other factors that are relevant such as growth.

It is a somewhat ‘golden scenario’ that inflation is substantially down at circa 2% which has not been the case for the UK for the last five years and it is in common with the deflation that appears to be affecting Europe at the moment (to a much greater degree).  Clearly food and fuel prices are under control and the VAT rise made sometime ago is out of the system.

What does this say about interest rates?  Well, it appears that there will not be any rises until well into 2015 since if inflation is under control and growth is persistent there is no need to ‘crank’ them.

There is therefore a little time left to fix interest rates on your mortgage even though a number of mortgagees are withdrawing some of the very attractive fixed rate packages.

There is no better time to invest in residential property (either for yourself or for buy-to-let) particularly in London up to £2million where the market is ‘rocking’ at the moment.

The prime and super-prime markets, particularly in the suburbs outside of Central London, are fragile at the moment and in the centre of London the numbers of cash buyers are far fewer than in the last two years.

Factors affecting this are the massive hikes in Stamp Duty over £2million imposed in the budget of 2012 and the specter of Mansion Tax.