Chancellor of the Exchequer George Osborne will this week be doing the rounds of various media studios suggesting that 2016 will be a challenging year for the UK economy. If the leaks are correct it is believed that he will focus on an expected increase in UK base rates during 2016 although in reality this is a decision for the Bank of England. There is a growing suspicion that George Osborne is clearing the decks for an increase in UK base rates although he has rejected claims that he is pressurising Mark Carney, the Governor of the Bank of England, into a move on interest rates.
Mortgage payments
When you bear in mind that UK base rates have not risen since 2007 even the merest increase will be a shock for many who have taken out mortgages during this low interest rate environment. This is a message which George Osborne appears to be trying to get across to UK homeowners amid concerns that some people may well have overextend themselves financially chasing their dream home.
The reality is that UK mortgage rates will start to increase well before the expected increase in UK base rates as markets become more in tune with the changing environment. We have had a number of false dawns, some of which have been fuelled by Mark Carney himself, but the recent increase in US base rates is a game changer for the UK. The concern amongst analysts is that an increase in mortgage payments across the UK will not only come as a shock to many but will have a significant impact on consumer confidence.
Debt fuelled recovery
It was interesting to see that George Osborne also tackled allegations of a “debt fuelled recovery” despite the fact that he has undertaken perhaps the greatest austerity programme ever seen in the UK. The concern from some experts is that record low UK finance costs are tempting some people to spend money on loans and credit cards which they may struggle to pay back in the short to medium term.
The fact is that there is nothing wrong in theory borrowing money at record low finance rates if there is the potential of a greater rate of return by investing this money. So far the UK property market has offered some of the best returns across the investment world but the change in UK base rates could hit short-term demand. As and when UK base rates do rise only then will we see the impact of recent tighter banking regulations with regards to “affordability”.
Conclusion
There is no doubt that both the UK and worldwide economy will have many challenges during 2016 and the UK base rate environment is almost certain to change. Even the merest increase in mortgage payments could hit many households fairly hard as money is still tight and economic growth, while impressive compared to the rest of the world, is not exactly setting the world alight. It does look as though George Osborne is clearing the decks for an increase in UK base rates and a changing economic environment in 2016.