Rates will level lower than before, says think tank

Interest rates will stabilise at a much lower figure than in previous years, says the Centre for Economics and Business Research (cebr).

It believes this autumn will see one faction of MPC members urging caution in case the housing market suddenly weakens further in response to the five interest rate rises since November 2003.

With a slowing housing market and low CPI inflation, the latest cebr report suggests that it is possible that the latest interest rate cycle will be coming to an end at levels much lower than previously expected.

During the previous peak in 2000, interest rates stabilised at 6 per cent, which was already lower than the peak of the cycle before last (with rates at 7.5 per cent in spring 1998).

The cebr predicts that this time "rates will not go higher than five to 5.25 per cent before starting to go down."

Additionally, there is a risk that further interest rate rises might boost the value of the pound at a time of weakening demand from some overseas markets. UK rates are already far above those in the US and Europe, at 1.5 per cent and 2 per cent respectively.

As far as house prices go, the cebr believes: "Even if house prices start to fall suddenly - and we do not think that they need to fall very far - mortgage payments will still be affordable."

It concluded its report by saying: "Since the underlying supply and demand patterns in the UK support the idea of house prices' continuing rise in the medium and long term, there is no need to panic."
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