Understanding interest rate fluctuations

With interest rate rises fast overtaking the weather as our main topic of conversation we take a look at who sets them and why.

The base rate is the interest rate at which the Bank of England lends to financial institutions. The base rate affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate. These factors affect consumer and business demand in a variety of ways and as such change the levels and movement of money throughout the economy. This level of control is absolutely vital in managing a number of economic variants driven mainly by inflation.

The Monetary Policy Committee
In 1997 the chancellor gave the Bank of England independence from political control. Since then interest rates have been set by the Bank of England's Monetary Policy Committee (MPC). The government sets an inflation target (currently 2%) which the Bank of England must endeavor to maintain by a margin of plus or minus 1%. In order to achieve this the MPC sets an interest rate that it judges will enable the inflation target to be met. If the inflation target is not met the Governor of the bank of England must explain why in an open letter to the chancellor.

The Bank's Monetary Policy Committee (MPC) is made up of nine members – the Governor, the two Deputy Governors, the Bank's Chief Economist, the Executive Director for Markets and four external members appointed directly by the Chancellor. The appointment of external members is designed to ensure that the MPC benefits from thinking and expertise in addition to that gained inside the Bank of England.

Each member of the Committee has a vote to set interest rates at the level they believe is consistent with meeting the inflation target. The MPC's decision is made on the basis of one-person, one vote. It is not based on a consensus of opinion and therefore reflects the votes of each individual member of the Committee.

The MPC meets every month to set the interest rate and throughout the month, the MPC receives extensive briefing on the economy from Bank of England staff. The nine members of the Committee are made aware of all the latest data on the economy and hear explanations of recent trends and analysis of relevant issues. The Committee is also told about business conditions around the UK from the Bank's Agents.

The monthly MPC meeting itself is a two-day affair. The meeting starts with an update on the most recent economic data and series of issues is then identified for discussion. On the following day the MPC members individually explain their views on what policy should be. The Governor then puts to the meeting the policy which he believes will command a majority; the members of the MPC then vote. Any member in a minority is asked to say what level of interest rates he or she would have preferred, and this is recorded in the minutes of the meeting. The interest rate decision is announced at 12 noon on the second day.

Why change the interest rate?
When the Bank of England changes the official interest rate it is attempting to influence the overall level of expenditure in the economy. When the amount of money spent grows more quickly than the volume of output produced, inflation is the result. In this way, changes in interest rates are used to control inflation.

A reduction in interest rates makes saving less attractive and borrowing more attractive, which stimulates spending. Lower interest rates can affect consumers' and firms' cash-flow – a fall in interest rates reduces the income from savings and the interest payments due on loans. Borrowers tend to spend more of any extra money they have, so the net effect of lower interest rates through this cash-flow channel is to encourage higher spending in aggregate. The opposite occurs when interest rates are increased.

Changes in interest rates can also affect the exchange rate. An unexpected rise in the rate of interest in the UK relative to overseas would give investors a higher return on UK assets relative to their foreign-currency equivalents, tending to make sterling assets more attractive. That should raise the value of sterling, reduce the price of imports, and reduce demand for UK goods and services abroad.

Changes in spending feed through into output and, in turn, into employment. That can affect wage costs by changing the relative balance of demand and supply for workers. But it also influences wage bargainers' expectations of inflation – an important consideration for the eventual settlement. The impact on output and wages feeds through to producers' costs and prices, and eventually consumer prices and therefore inflation.

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Rental demand outstrips supply

Demand for rented properties seriously outstripped supply and rent levels rose during the first part of the year according to ARLA. These results show the shortage of properties and the continuing need for investment in the private rented sector at all levels.

Rents rose for the fourth quarter running for each type of property, including detached, semi-detached and terraced houses and flats. As a result of increased demand, void periods have fallen to an average of 24 days.

Over two thirds of all agents in Prime Central London report rising rent levels. Half of the agents in the rest of the South East say the same and in the rest of the country the proportion of agents reporting rises rose from 33% to 35%.

Seven out of ten Prime Central London agents say there are more tenants than properties. This is the highest figure seen since the surveys started six years ago. In the South East, ten percent more agents report demand is outstripping supply and the proportion in the rest of the country with a lack of supply has also risen.

Commenting Adrian Turner, Chief Executive of ARLA said, "There is a shortage of all forms of housing in this country and these results show that the shortage of good quality property is also apparent in the rented sector."

The average capital asset values of rented houses rose during the past three months by 2.2% in Prime Central London, 0.3% in the Southeast and, by contrast, fell by 3.9% in the rest of the UK."

Average rented house values ranged from £885,000 in Prime Central London to £229,900 away from London and the South East.

Rented flats did less well, with the average asset value across the country down by 1.3% for the three month period. Asset values for flats ranged from £501,000 in Prime Central London to £210,000 in the South East and just £153,000 in the rest of the country. However, flats showed a slightly higher gross return.

Despite the rising rent levels, the average weighted returns are down marginally from 5% to 4.8% for houses and from 5.1% to 5% for flats.

Tenants continue to stay in rental properties for an average of well over a year. They remain in the same property for the longest in Prime Central London at an average of 17.7 months. This compares to an average of 15.2 months for the South East and 14.2 months elsewhere. These figures have shown little change for the past two years.

Said Adrian Turner, "Even though it still needs more investment, the Private Rented Sector is continuing to provide choice in housing and a safety valve for the housing market, particularly now, at a time of mixed expectations for future strong rises in house prices."

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"A great attitude does much more than turn on the lights in our worlds; it seems to magically connect us to all sorts of serendipitous opportunities that were somehow absent before we changed." - Earl Nightingale 1921-1989, Philosopher and Syndicated Radio Personality

"In the confrontation between the stream and the rock, the stream always wins - not through strength but by perseverance." - H. Jackson Brown Author of Life's Little Instruction Book

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Beware of the dream stealers by Dennis Waitley

Although your own internal measurements are the most important, you will occasionally need to seek external feedback on your progress toward your goals. When you do, be sure it is from people who are truly interested in seeing you succeed. Don't seek feedback from fair-weather friends, competitive peers, or any person who doesn't have your best interests at heart. Get feedback from someone who is on your side but will still be objective and honest with you.

I've observed time and again that misery truly does love company. Jealousy creates some of the most miserable people I know. Surpass the achievements of your particular social crowd or your business colleagues, and look out for the slings and arrows of those who wish you were back where they are. You have to dodge the snide remarks and catty comments. Let them roll right off you.

Only pay attention to feedback from those who have similar goals or who are working actively alongside you to achieve goals of their own. Motives and fears run deep. Study them in others. The sympathetic fair-weather friend who supports you and comforts you when you're down, may like you best when you are in just that state: down and dependent.

Ultimately, nobody else is responsible for your life but you. Nobody else is accountable for your actions but you. Therefore, nobody's expectations for you and opinions about you are as important as your own. So make sure those take precedence in your mind over all others, and if you do need to consult with someone else, think very carefully before you choose exactly who.

People are most interested in their own dreams and goals. They have difficulty believing that you have found a better way than they have to reach them. They are suspicious and guarded when anyone tries to sell them or change their minds. Rather than have others steal your dreams by raining on them, ask questions and find out about their dreams before you launch into your sermon. People buy what they want first, then what they need. Find what turns them on. It may not be what turns you on. By helping others get what they want, you'll get what you want too!

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"There is a basic law that like attracts like. Negative thinking definitely attracts negative results. Conversely, if a person habitually thinks optimistically and hopefully his positive thinking sets in motion creative forces - and success instead of eluding him flows toward him." - Norman Vincent Peale 1898-1994, Minister and Author

"Being defeated is only a temporary condition; giving up is what makes it permanent." - Marilyn vos Savant Author

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What's available?

We currently have the following investment opportunities.

UK property
Spa Court, Spa Road, Gloucester, GL1 1UZ
Gatehouse Lofts, Amber Wharf, Shipley, West Yorks. BD17 7BE
Priory Vale, Swindon, Wiltshire. SN25
Spa Court, Spa Road, Gloucester, GL1 1UZ
The Hermitage, Hermitage Road, Kenley, Surrey, CR8 5EA
Barkers House, Gleadless Road, Sheffield, S2 3AE
The Jam Works, Fleet Street, Liverpool, L1 4AN
Perseverance Mill, Dewsbury Road, Elland, West Yorkshire, HX5 9AX
Sherbourne Park, Chandlers Way, Sutton Manor, St Helens, WA9 4TY

Overseas property
Our overseas property division – Property for Life International - now has its own website. Take a look at www.pfl-international.com.

If you are looking for quality overseas property you need look no further. Whether you want discounted French property with guaranteed rental returns, a luxury villa overlooking the Mediterranean or maybe something a little more exotic we can help.

Property for Life International is growing fast and over the coming months we will be offering even more exceptional opportunities in an increasing choice of locations

Please go to www.pfl-international.com for full details and look out for more great opportunities coming soon!

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Upcoming events

Over the coming months we will be running a number of property investment academy sessions as part of our ongoing academy programme. For full details of the academy programme and an online booking form, please take a look at http://propertyforlife.com/whyinvest/education.html. Additionally, our events calendar can be viewed at http://propertyforlife.com/profile/events.html

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Do you fancy a spending spree at one of the UK's leading department stores?

The new look Property for Life referral programme can offer you just that.

All you need to do is tell an interested friend about Property for Life and you could soon have a minimum of £250 in gift vouchers to spend in any John Lewis or Waitrose store.

Quite simply, for each person introduced by you who then purchases a property through us you will receive a cool £250 in John Lewis gift vouchers. If they purchase more than one property you will receive £250 in gift vouchers for each property they purchase. You could soon be well on your way to that spending spree.

Remember, the more people you introduce the more chance you have of grabbing at least £250. So why not tell your friends and family about Property for Life? Make sure they register on-line at www.propertyforlife.com/register. When registering it is important that they select the recommendation option in the 'How did you hear about us' section of the form and include your name in the 'other' box.

Please note that the referral programme is on a per property not a per person basis. Please see www.propertyforlife.com/services/referalprogramme.html for further information.

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