The nationalised banks don’t believe Brown’s inflation forecasts

Are you one of those mortgage payers fortunate enough to be on the Standard Variable Rate and currently enjoying repayments at record low levels? If so, you are probably wondering whether to fix your mortgage and when to do so?

The answer to that question mainly depends on whether you believe in the Treasury’s inflation forecasts for the next few years, which are currently predicting:

..................CPI.............RPI (excludes housing costs)
2009............1.6.............-1.3
2010............1.5.............1.7
2011............1.5.............2.3
2012............1.8.............2.9
2013............2.0.............2.5

If the Treasury is right, or if we move towards a period of deflation as some people suggest, you’d be better off sticking to the Variable Rate, as base rates are going to be low for a very long time. There are certainly deflationary pressures in the economy: consumers are being far shrewder on the high street, retailers are squeezing suppliers and employers are imposing wage restraint.

But if you believe the Treasury is way wide of the mark, and inflation will come back big time, fixing your mortgage becomes more attractive.

All the policy indicators point to a return of inflation - Bank of England lending rates at a 300 year low, the biggest public spending deficit since 1942 (we are running a wartime economy without a war) and quantative easing (the posh term for Robert Mugabe’s policy of printing money). Never in our history have we experienced a monetarist or Keynesian expansionist policy of these proportions and never has this monetarist and Keynesian expansionism been run in parallel.

On Monday, Northern Rock withdrew its 5 year fixed mortgage rate that it had been offering at the weekend. They clearly don’t buy the Treasury forecasts. By midnight tonight, most high street banks and building societies will have followed suit. A financial adviser friend of mine says the last two days have been manic as desperate consumers panic to fix rates while banks and building societies withdraw offers without notice.

Yesterday’s inflation figures showed that the CPI rate is stubbornly refusing to fall below the 2% mark (despite the fact that we are told we are in a period of deflation). With oil and commodity prices’ beginning to pick up, the prospect of significantly lower inflation in the short term looks unlikely.

But the prospect of high inflation in the medium term is now a real possibility and it seems the nationalised banks are beginning to agree.