Inflation in the UK hit the 4.5% mark in April up by 0.5% from March putting further pressure on the Monetary Policy Committee to increase interest rates, but will they?

This is the question on the lips on many contractor mortgage holders.

Inflation in the UK is measured by the Consumer Price Index (CPI) which is a calculated index showing how the average cost of consumer prices changes over time. The Bank of England (BOE) has a target for CPI which is 2%. In the past when inflation has crept up above this level, the BoE have increased the Base Rate to subdue inflation, the idea being that if interest rates are higher, consumers will be more inclined to save and the cost of borrowing money will increase therefore effectively slowing down consumer spending. With less demand, supply becomes cheaper and prices fall – inflation decreases.

So surely interest rates will rise fairly soon then?

Maybe not, if a recent open letter from Mervyn King, the Bank of England Governor to the Chancellor George Osborne is anything to go by. Mervyn King detailed in the letter that it would be risky to attempt to meet the inflation target in the short term with sudden changes potentially leading to undesirable volatility in output and would in fact increase the chances of undershooting the target in the medium term.

Ben Rogers from Contractor Mortgages Made Easy says that this is one of the clearest signs yet that the Monetary Policy Committee is aware that the inflation figures have been heavily affected by a number of outside influences. These outside influences, such as the VAT increase in January, increasing energy prices and import prices are giving a false impression of inflation.

Mervyn King went onto say that he believes it will get worse before it gets better with inflation figures likely to increase further over the coming months. However, he believes inflation will fall back through 2012 and 2013.

There is an argument that if inflation remains high, there will be a pressure for wages to increase. If wages are increased then inflation will not decrease as much as it needs to and a rise in rates may be the only way to subdue inflation. But levels of economic activity remain weak and as such the current view of Mervyn King is that once these temporary influences wane, the downward pressures on inflation could drag inflation below the target.

Whilst Mervyn’s words give a good indication that the Bank of England Base Rate will hold at 0.50% for a while longer, there are sufficient uncertainties to suggest that rates could rise within the next 6 – 12 months. With a reduced number of contractor mortgages available in the marketplace this is a really concern to those contractors who are either looking to purchase or re-mortgage in today climate.

Contractor Mortgages Made Easy advise if you are currently looking for a mortgage would be to understand the mortgage product you are looking for and the risks associated with it by speaking to a specialist contractor mortgage advisor. Hindsight is a wonderful thing and without having a crystal ball, the right mortgage product for you should be picked based upon your attitude to risk and not solely on what economists or the like believe will happen to rates.

Author Bio: Article written by Ben Rogers, Senior Mortgage Consultant at Contractor Mortgages Made EasyTo contact us regarding this article e-mail: media@contractormortgagesuk.com

Category: Advice
Keywords: Contractor Mortgage, Contractor, Mortgage, Contractors, Mortgages, House prices, Inflation