Latest Interest Rate Predictions – March 2012

UPDATE April 2012 - this post relates to March 2012. For my latest interest rate predictions click here.

 

So when will interest rates go up?

The market’s views on when interest rates will rise was continually pushed back throughout 2011. In September, for example, it centred around mid 2012. But the unanimous voting at the last 7 MPC meetings as well as the deteriorating economic backdrop have seen markets price in the first rate rise as being in the last quarter of 2014.  

But why?

• Rates remain at 0.5% – last month the Bank of England’s Monetary Policy Committee (MPC), who are the guys who decide the UK base rate, once again voted to keep the base rate at 0.5%, for the 35th month in a row.
• NO support for a rate rise – last month the Committee once again voted unanimously (9-0) to keep rates on hold.
• Inflation remains high but expected to fall – inflation fell, as expected in January (down to 3.6%). But high inflation could derail an economic recovery. To combat inflation interest rates are usually increased. Although inflation remains stubbornly high it is expected to fall further in 2012, and back under the Bank of England's 2% target in 2013.
• Economic growth is weak – With the eurozone debt crisis still unravelling a global recession is likely, the UK included. Perhaps unsurprisingly, the UK economy contracted by 0.2% in the last quarter of 2011. One more quarter of negative growth and the UK will officially be back in recession. With the UK economy in a bad way (high unemployment etc) increasing rates could tip personal finances over the edge and spell disaster. Especially as nearly half of home owners are living in fear of a rate rise. This will deter the MPC from raising rates. But rather than a rate rise even more Money Printing (aka Quantitative Easing) by the Bank of England is likely.
• Unemployment rose – UK unemployment rose by 48,000 in the three months to December, to 2.67 million. The unemployment rate now sits at 8.4%, the highest since 1996. And this is before the government's austerity measures fully kick in. In November's Autumn Statement the Chancellor revised up the number of public sector jobs to be lost by 2017 from 400,000 to 710,000. Such a huge unemployment figure is never a good thing.
• Any signs of green shoots? – While the latest UK GDP figures disappointed there have been reasons for optimism. In January, the UK services sector (a key driver of the UK economy) grew at it's fastest rate since March 2011. In addition, the manufacturing sector returned to growth. And recent surveys suggest that the UK  economy should grow in the first quarter of 2012, so avoiding an official recession. The green shots have given markets (and Mervyn King) optimism that the UK economy may be in better shape than feared - as a result their prediction for when interest rates will rise have come in a bit closer (in January markets had predicted rates won't go up until 2016).
• But UK Economic growth forecasts continue to be cut –despite the green shoots some analysts are still predicting a contraction in GDP in 2012. The British Chambers of Commerce believes that the UK will avoid recession but has cut its growth forecast for 2012 from 0.8% to 0.2%. Raising rates would hammer consumers further and could derail any sniff of an economic recovery which would be bad news.
• Mervyn King is still not panicking and doesn't want to raise rates – Mervyn King is the guy who heads up the group of people who set the bank base rate. Mervyn has previously said that there would be no rise in interest rates until there was clearer evidence that the economy was growing and that unemployment and the interest rates actually paid by consumers were falling. None of these will be happening any time soon and the MPC has come under criticism from an ex-member for forming a 'consensus' of opinion around Mervyn King.
• The stock markets has taken off! - Stock markets have taken off in the first quarter of this year largely due to mass money printing by the world's central banks. While confidence (misplaced?) has returned the underlying problems, such as the eurozone sovereign debt crisis, have not been resolved. So while the world may be more optimistic it is far from fixed.  Any knock-on wealth effect may be short lived and national and personal finances are still stretched.