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Financial Outlook

As we approach the end of the year there is more and more speculation as to what 2007 will hold in terms of finance and the economy as a whole. The state of the nation’s economy has a large impact on the wealth of its inhabitants, so it is in everyone’s best interest for stable growth to occur, but will it?

At the start of this year there was concern that the housing market was heading for a crash, coming off the back of sharp slowdowns in mortgage lending and house prices during the latter half of 2005. Along with this the manufacturing sector was struggling and in recession, all of which meant that investment spending was subdued and there didn’t seem to be much aside from Government spending to support economic growth.

Thankfully demand for housing began to rise, and as the demand picked up so too did the prices, this in turn helped to propel consumer spending higher, while at the same time the manufacturing sector began to recover.

This trend continued throughout the year, and has resulted in headline inflation running above the set two percent limit since May, at present it is around 2.4% with predictions that it will rise to 2.8% before the end of this year. Controlling inflation is the main aim of the Monetary Policy Committee (MPC), and the main way in which they do this is to adjust the base interest rate.

With inflation running above target, and the housing and consumer markets still in growth, it is likely that the MPC will have to raise interest rates before the end of the year in order to bring inflation back in line with the target. Many economists are predicting that this rise will be brought into effect in November, leaving the base rate at five percent.

While on the face of it such a rise in interest rates appears to be bad news for borrowers, pushing up the cost of borrowing for both loans and mortgages, in the wider scheme of things it is actually a good thing. The economy is continuing in a strong fashion, which is good news for everyone – unabated inflation and a crash of the housing market would be no good to anyone, controlled growth benefits all, even if the interest rate measures taken to ensure that may hurt people’s pockets a little in the short term.