Will the jump in inflation lead to an early rise in interest rates?

If any other landlords are like me at the moment they will be praying for the economy to stay in its current slump for a very long time.

We have interest rates resting nicely on the floor. I'm paying practically nothing for my buy-to-let mortgages which are all on tracker or variable rates. House prices are slowly coming down to levels which represent long-term value. I'm looking this week at two properties at auction which have guide prices that indicate that have a gross yield of 10%. In reality at sale and improvements this is likely to be closer to 8% than 10%. But this in my view starts to represent reasonable value particularly because both properties are in good areas.

The fly in the oitment is the potential for interest rates to rise and spoil the landlords party.

Inflation jumped last month unexpectedly and is currently a full 0.9% above the Bank of England's target of 2%. Indeed another 0.1% and it would lead to one of those embarrassing open letters from the Bank of England Governor Mervyn King to the Chancellor explaining why he has been a naughty boy and missed his target. Does he get detention as well I wonder?

Will the spike in inflation lead to an early rate rise?

The concern for landlords is that the spike in inflation will lead to a sudden and dramatic rise in interest rates.

My view is that this is unlikely. Yes the rise was a shock and has caught out by a number of one off factors. However, the underlying strength of the economy and economic recovery is still weak. Most economists expect inflationary pressures to subside in the coming months. Interest rates will inevitably start to rise but some have predicted that this is unlikely before the election expected to take place in May. Unemployment is still rising and policy makers are concerned that they don't choke off the fledgling recovery before it has got underway. So rates will rise some time this year. But probably not dramatically. The chances are they are unlikely to climb above 1% this year and then above 2% next. The road to normality may thankfully be a slow one.....which is fine by me.

For more information on the future direction of interest rates check out the latest SWAP rates.

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