Rising interest rates

06 March 2010
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As expected AIB signaled that they would raise their standard variable rate by.05% over the coming months.There is no surprise in this move and given the state of this banks balance sheets it is inevitable that they will need to increase rates further over the coming year.

Aib are doing what many of the other "lenders" have done over the past year.

Aib are also holding millions if not billion sin loss making tracker mortgages.

In regard to trackers their may be scope for the lenders to introduce some form of capping mechanism where in return for a guarantee by lenders that that customers interest rates will not go over x% they would move from their tracker to a variable product.For example a 1% tracker margin holder who is exposed to ecb interest rate rises might not like the idea of paying greater than say 5% and will be willing to pay a margin for this certainty.

We expect ecb base rates to remain at 1% during 2010 and rising to 2% + during 2011.We would not be surprised to see ecb base rates at around 3.5% in 2012. These are only our best gestimayes based on the views held by many economists and central bankers.

Given that rates will rise over the next two years it makes sense to look very closely at 5 year rates or indeed 10 year rates both of which are priced between 4 and 5%.