Borrowers are close to the eye of a perfect storm with debt markets at the moment.

For a long time now the mortgage squeeze has increased the cost of borrowing money. These costs have already been passed onto the borrower.

Now the threat of an inflation explosion has forced central banks to increase official rate, dealing yet another blow to mortgagees. Earlier today the European Central Bank (ECB) had increased the official rate from four per cent to 4.25 per cent, after an inflation figure revealed this week of four per cent basically forced the central bank’s hand.

But it is not just the current inflation rate the concerns the European bank as higher costs are expected to keep upward pressure on the inflation rate for some time yet.

Finally inflation has been given the respect it deserves, and while many argue that rising interest rates will not lower inflation, it is a fundamental principle that taking money out of the economy will cool demand, even for oil, and this in turn will help to rein in inflation.

There is no denying it that this is a perfect storm for homeowners as more and more struggle with their budget. If this trend continues for the rest of the year expect the number of defaults on mortgages to rise substantially.

If there is any clear sky it is for the savers. With the higher cost of money, people with savings are able to find rewards with high interest term deposits and savings accounts.

The economic downturn, which began in late 2007, looks to be drawing out into 2009 and beyond.

Indicators are showing a laboured but growing economy, more akin to a cooling economy rather than a total freezing.

It is views shared by many analysts who are now expect higher energy prices and inflation to limit growth.

The Council of Mortgage Lenders (CML) has added to the pessimistic view by forecasting a continued decline in housing prices in 2008 as buyer delay purchases.

According to the CML it expects a decline in housing prices in 2008 of around seven per cent.

“In the wake of the credit crunch, 2008 will be remembered as a very weak year in the housing market,” CML director general Michael Coogan said. 

But our forecasts assume some indirect benefits from the Bank of England special liquidity scheme beginning to have an effect in the mortgage market in the later part of the year,” he said.

It seems that times are changing and more people are expecting a long and slow recovery.

The CML’s last forecast predicted a return to growth towards the end of 2008.

The credit crisis was the catalyst for the current woes but it is the ongoing threat of high inflation that will keep a lid firmly on any recovery.

The inflation risk is enormous and no central bank can afford to sit back and wait for the economy to turn around with low interest rates.

Interest will rise and rise sharply.

No amount of liquidity will boost lending when customers are faceing rising interest rates and inflated petrol prices.

It might be weak but the UK has experienced economic growth in the first three months of 2008.

Despite the economic slowdown and low consumer confidence the Office of National Statistics has reported that the UK economy grew by 0.4 per cent in the first three months.

The growth was reported in analysing the gross domestic product for the first quarter.

The growth is lower than what was expected by analysts, but GDP is still growing rather than contracting. Many expected the slowdown to be so steep that it would result in negative GDP in the first quarter.

The strength came from the service sector that grew by 0.6 per cent in the quarter. The biggest percentage decline was in mining and quarrying, which fell by 5.2 per cent.

There is a chance that the UK might just avoid a recession, and the lower growth might give the Bank of England the confidence to lower interest rates again next month to keep the balance sheet in the black.

The bank expects this slowdown to have a negative effect on inflation; it has yet to come to fruition with high food and energy prices maintaining pressure on prices.

Do we need a retraction in the economy before inflation starts to slide?

Maybe, but is it really worth the risk.

The smart money is on the Bank of England maintaining the base rate at its current levels, and wait to see if market weakness can reduce the inflation rate.

As we have seen in the last year or so, the market has more impact on inflation than any action by the Bank of England.

Halifax, the UK’s largest mortgage lender, has turned its attention to borrowers with significant deposits.

To draw in this market Halifax is offering discount rates for borrows with capital.  The best rate is reserved for borrowers with 25 per cent or more of the property value.

For struggling first-home buyers looking to get into the market with low deposits, there are even tighter rules which attracts a higher interest rate.

It was not unexpected, with a tight liquidity market and greater value put on low-risk borrowers, there is a growing trend for lenders to look at the quality of their loan books rather than quantity.

Halifax’s new mortgage packages is only one example of how the credit crisis gripping the global markets will affect the UK credit market in the long term.

In the short term these new lending packages will contribute to a slowdown in mortgage approvals and overall housing market weakness.

However in the long term the tougher credit rules will strengthen the credit market and bring renewed confidence to the domestic economy.

The question is who has to hurt now, for a brighter economic future. The answer seems to be struggling homeowners who are already sailing hard into the wind of high household debt and raising costs, and renters who are facing higher rents and major hurdles to buy into the housing market.

These two large groups are usually the first to suffer in any period of economic slowdown.

Sub prime is a buzzword at the moment, and the way things are going it will soon earn an entry into the Oxford dictionary.

The meaning could be twofold: (n.) loans given with little or no security from the borrower, or (adj.) the description given to an economy suffering from poor management and slack lending standards.

Sub-prime the adjective is headlining the business pages at the moment.

It was used by BBC recently when reporting another write-down by Swiss financial group UBS.

UBS also announced that the chairman Marcel Ospel has stepped down in light of these latest write-offs.

There are financial companies out there with falling stock prices due to the “sub-prime crisis”, but have strong management and well-maintained balance sheets.

These companies will be the market darlings after the dust settles and the crisis is over.

But, now could be the right time to re-enter the market and pick up some of the stock on the cheap.

A word of warning however, it is important for any investor to do their homework, ask questions and make educated decisions.

Analysts and investors are concerned that, despite financial institutions writing off billions of pounds in the last quarter 2007 and this latest quarter, there is still billions unaccounted for as more borrowers struggle with their loans.

There may be a few more big institutions to fall yet, but you can be sure there are many companies out there with the right checks and balances in place to weather the storm.

Britain’s housing prices are down again but still up for the full year, according to one of UK’s leading credit society.

Nationwide has announced that housing price have fallen in March by 0.6 per cent, it is the fifth consecutive loss and extends the loss of 0.5 per cent recorded in February.

Property prices are still up for the full year by 1.1 per cent the lowest growth in 12 years.

“However, prices are still 11 per cent higher than two years ago and 47 per cent higher than five years ago,” said Nationwide’s chief economist Fionnuala Earley.

The major concern about these figures is that housing prices are continuing to deteriorate at a stronger pace.

While it is not as dramatic as the double digit falls seen in the US, the US example shows that a reduction in house prices can have a dramatic effect on the wider economy.

Housing price is one economic indicator that many analysts look at when gauging Britain’s long-term economy health.

It is an important indicator because for many people their homes are their biggest investment and deterioration in price is a reduction in household wealth.

If housing prices do not recover then Britain, like the US, may face a more severe slowdown in economic growth that affects more homeowners in the UK.

A peak business group has looked into its crystal ball about economic growth and it has found some numbers.

While some analysts are laying low until more substantial data about the direction of the economy is revealed , CBI has claimed that the Treasury’s forecast of Britain’s economic growth in 2008 of between 2.25 and 2.75 per cent was optimistic and growth was more likely to be around 1.8 per cent.

CBI went further in its analysis stating that inflation was likely to top 3.2 per cent before being reeled in, sparking a reduction in interest rates in the second and fourth quarters of this year reaching a base rate of 4.5 per cent.

The group also stated that low economic growth is likely to remain throughout 2009.

Do you think this forecast is specific enough? It is amazing what can be stated when the forecasters are not held accountable.

The Treasury would be held accountable on its forecasts.

The CBI forecast is just one of the many forecasts available on economic conditions in Britain, there are many business and financial groups gazing into the crystal ball at the moment and there is very little consensus.

Some are claiming the worst is over, while others are still talking doom and gloom.

No wonder the average investor is becoming confused.

It isn’t helped by the mixed signals coming from market data.

Employment is strong, but business investment and confidence is down, also the economy is contracting but inflation pressure is up.

When will it end?

The latest inflation figure released by the Office of National Statistics suggests Britain’s homeowners might not receive any interest rate cuts in the near future.

The latest figures showed inflation at 2.5 per cent.  Well above the Bank of England’s comfort zone of 2 per cent.

This is the second rise in as many months with the figure rising from 2.1 to 2.2 per cent in February.

Inflation is notoriously hard to manage with the trends difficult to reverse and although there is a new method of calculating inflation by the Office of National Statistics it is clear that inflation is on an upward move.

If the Bank of England starts rising interest rates to stem inflation there is a real possibility interest rates will be increased several times before inflation is back under control, particularly within an environment of rising energy costs.

In economic conditions like these it is important for homeowners to recalculate their home loans and determine what they can comfortably afford if rates increase.

This is a pattern that is forming across most of the industrialized countries at the moment.

As rates rise more and more homeowners are suffering from mortgage stress.

Buyers should calculate their repayments at 3 to 4 per cent above current interest rate levels to ensure they will be able to maintain repayments when the official rate inevitably rises.

After reaching record highs earlier this week of US$108 a barrel, analysts are wondering how high the oil price can go.

This uncertainty is compounded by the fact that OPEC has stated that it will not increase output because speculation is pressuring prices and the fundamentals haven’t changed.

Less than a decade ago the organisation was spouting that it would maintain oil around US$30 a barrel after coming off the lows in the early 90’s

We have seen the price triple that target over the past decade, and still they will not budge to increase output.

Could it be that the OPEC countries cannot increase output and they are already sailing hard into the wind?

Some analysts in the US have grave concerns about these figures, and even the International Energy Agency (IEA) has suggested higher prices were here to stay because of demand for oil from China and India.

Despite warnings from the IEA the OPEC president stated that output would not increase any time soon because the current record prices were artificially inflated.

Consumer confidence in Britain is on the wane according to a study by one of the county’s leading retail organisations.

The British Retail Consortium reported that retail sales were slowing. 

According to the report, sales roses by 1.5 per cent last month, this compares to a rise of 3.3 per cent in February 2006.

People were still shopping, but price was an increasingly important factor for most consumers.

“Shoppers are still very price-conscious and reluctant to splash out on major purchases, so discounting was still needed to tempt customers to buy,” the consortium reported.

Even with strong food sales the slowdown in consumer confidence should put downward pressure on inflation.

The Bank of England’s Monetary Policy Committee (MPC) has played a conservative hand lately.

It has maintaining interest rates to see how the fallout from the US affects the domestic economy.

But with consumer spending down and confidence falling, it should be enough for the MPC to consider dropping rates.

There is increasing instability however with increasing wage pressures and high energy prices rising costs.

For the homeowner it might be time to lock in an interest rate, or ensure that you have enough income to cover any interest rate increases.