INTEREST RATES, INFLATION AND MORTGAGES

Interest rates have recently been cut, again, by the Bank of England. The cut was only by 25 basis points (0.25%) but it was a cut nonetheless. So the cost of money to the main banks and lenders is now cheaper. Normally this is great news.

It's not that simple, however. While the average "man-in-the-street" Englishman with a mortgage hopes that his monthly mortgage payments will come down - they probably won't. This is mainly for 2 reasons.

The first - the way many people have structured their mortgages. I'm not an expert on the types of mortgages the English banks and other lenders offer their customers but I do understand the basic concepts. The problem is that a lot of people have fixed rate mortgages. Here they have chosen to fix their interest rate for some period of time - usually two years. So any interest rate changes - either up or down - will not result in any change to the monthly repayments.

The second - major lenders are not compelled to reduce the rates they offer their customers. So while the Bank of England does it's best to aid the man in the street some lenders will use this as a window period to make more profits. Their costs have come down but they haven't dropped their price to their customers.

It's certainly an interesting time that I have chosen to start my new life in the UK. Normally an interest rate cut by a country's central bank would happen during a period of stable prices, however at the moment, in England, the current government appears to be losing the fight against inflation. Dropping interest rates normally increases the money supply, which in turn drives up the rate of inflation.

It's going to be a very interesting next couple of months. Will the major banks tow the line and pass on the interest rate cuts to their customers and how will the interest rate cut further fuel inflation? Only time will tell.