Fasten your seatbelts, turbulence ahead



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Last week's announcement by Bank of England Governor, Mark Carney, that interest rates could rise later this year, came as a surprise even to the City, which had priced in a rate hike....

Last week's announcement by Bank of England Governor, Mark Carney, that interest rates could rise later this year, came as a surprise even to the City, which had priced in a rate hike for 2015 at the very earliest…

Carney said: "There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect."

So there you have it - the beginning of the interest rate up-cycle that we have talked about for so long, is now looking pretty imminent. This is the big one and nobody is really quite sure what could happen.

On a positive note, job numbers are continuing to improve. The latest data from the Office for National Statistics showed that the number of people working rose by a record 345,000 in the three months to April, and that the unemployment rate is now down to 6.6 per cent.

On a less positive note, wage inflation is still weak, mortgages (and remortgages) are getting harder to secure and there is still a lot of debt in UK households. If mortgage costs go up, even by a relatively small percentage, many people will almost certainly feel the strain.

What particularly worries me though, and this is a new development, is the fact that George Osborne is now bowing to pressure and giving Threadneedle Street the power to cap mortgages.

If this cap is at three, or even 3.5 times the income, then, as Gavin Kelly of the Resolution Foundation, a think-tank, rightly points out, it could cause real problems for those seeking to remortgage their way out of trouble.

Gavin said: "The regulators need to carefully consider what they [mortgage caps] would mean for the large numbers of people who already have mortgages who will be looking to refinance to insulate themselves from future rate rises."

The idea of capping mortgages to hedge the economy is honourable in theory, but is now really the time to implement such stringent policy measures? I'm not so sure.

Now don't get me wrong, I'm not a doomsayer. Managed carefully, we may just come through the up-cycle. But if policymakers take even a small step wrong, the economic recovery to date, could come down like a house of cards.

It’s time to put on the seat belts — there’s expected to be some turbulence in the not too distant future.

 

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