Ray Boulger of Charcol, says interest rates will fall in the first half of 2005, with the Consumer Price Index being the key to when rates will start falling again.

Commenting on yesterday’s decision by the Monetary Policy Committee (MPC) to freeze base rate at 4.75% ray Boulger said: “Today’s announcement was a foregone conclusion and there is little remaining doubt that the base rate has now peaked."

"Looking forward to the first quarter of 2005, the MPC will have to increasingly consider the risk of the Consumer Price Index (CPI), currently at 1.2%, falling below the 1–3% target range set by the chancellor."

“Mervyn King will obviously not relish the thought of being the first Governor to have to write to the chancellor to explain why he has allowed the CPI to fall outside his target range. However, the oil price is now over 20% off its recent peak, the weak dollar is depressing import prices and retail sales are sufficiently slow to persuade many retailers to make pre Christmas price reductions. This all adds up to downward pressure on the CPI, increasing the likelihood of a base rate cut earlier than is generally expected.”

What should borrowers do now?

Trackers, or discounts, remain the product of choice for homeowners looking to take advantage of rate falls, says Boulger. That said, the cost of fixed rate mortgages has fallen significantly over the last few months, with 2-year fixes now available below Bank base rate and 5 year fixes below 5%. Fixed rates are likely to come down further next year on the back of further falls in swap rates and an even more competitive lending market in the new year.

Despite this, a 2-year fix below base rate is reasonable value for borrowers for whom interest rate security is important, although waiting if possible until 2005 before committing to such a deal would be wise. For those borrowers looking for longer term security Coventry’s lifetime tracker at Bank base + 0.5% with a cap and collar of 5.69% and 3% until 31/3/10 is a good alternative to a 5 year fix.