Ed Bowsher, head of consumer finance at lovemoney.com, has given his predictions for our finances in 2010:
Base rate and inflation:
- Inflation will rise early in the year thanks to higher oil prices and VAT going back up to 17.5% from 1st January. As measured by the Consumer Price Index (CPI), inflation will peak at 3% or a little higher. Once those one-off effects have made their impact, inflation should slip back later in the year.
- Given the benign inflation environment, the Bank of England shouldn’t need to raise the base rate in the first half of 2010. We might see a rise to 0.75 or 1 per cent later in the year.
Mortgages:
- Regulators will continue to insist that the banks keep more cash than they did in 2006. That means they’ll have less money to lend out than they did in the days of the pre-crunch boom.
- Higher gilt yields will push up rates on long-term fixed-rate mortgages.
- Short-term rates will probably only rise by a small amount as they’re mainly governed by the base rate and Libor which should both stay low.
Savings:
- As the banks’ balance sheets gradually improve, they won’t be so reliant on ordinary savers to provide funds for lending. In other words, they will find it easier to borrow from other banks and investors on the wholesale markets. That will be a downwards force on savings rates in early 2010.
- Later in the year, rising gilt yields and a slightly higher base rate will probably push up the rates paid on many accounts.
House prices:
- House prices will slip back a little in 2010. The Conservatives look likely to win the next election and they will make big cuts in public expenditure. That will keep unemployment rising which will trigger forced sales of homes.
- There won’t be a dramatic rise in mortgage lending, so that won’t help house prices either.
VAT:
- The next government will be under huge pressure to improve the public finances. When Mrs Thatcher entered power in 1979, she raised extra cash by increasing VAT to 15 per cent. The next government could bring in an extra £12 billion by pushing VAT up to 20 per cent.
