Latest Interest Rate Predictions – November 2011

 

Update 08/12/11 - the newest interest rate prediction can be found here

 

 

So when will interest rates go up?

The market’s views on when the first rate rise has continued to be pushed back throughout 2011. Last in September it centred around mid 2012. But the unanimous voting at the last three MPC meetings as well as the ongoing volatility in investment markets have seen markets price in the first rate rise being in Spring 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 31st 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. This represents a huge change in stance, compared to earlier in the year, and means that an interest rate rise in the near future is less likely. (in July the MPC voted 7-2 to hold rates)
• Inflation remains high but expected to fall – September's inflation measure (called the Consumer Prices Index or CPI) rose to 5.2% from 4.5% in August . High inflation could derail an economic recovery. To combat inflation interest rates are usually increased. Although inflation remains stubbornly high but it is expected to fall back in 2012 and back under the Bank of England's 2% target in the medium term.
• Economic growth is weak – economic growth as measured by Gross Domestic Product (GDP) was negative (-0.5%) in the last quarter of 2010. This trend was reversed when GDP grew by 0.5%  in the first 3 months of 2011 and then by 0.1% in the second quarter. GDP for the third quarter was better than expected (at 0.5)% but the economic recovery is still fragile. With the eurozone debt crisis still unravelling a global recession is likely, the UK included. 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. Perhaps what is more likely is a more Money Printing (aka Quantitative Easing) as we saw in October.
• Unemployment rose – UK unemployment rose unexpectedly by 114,000 in the three months to August, to 2.57 million - a 17 year high! And this is before the government's austerity measures fully kick in. Such a huge unemployment figure is never a good thing.
• Any signs of green shoots? – As mentioned UK GDP figures for the third quarter were better than expected. Consumer spending figures still disappoint but on a positive note the UK services sector (a key driver of the UK economy) accounted for much of the pick up in GDP. By contrast the decline in the manufacturing sector accelerated. Despite the greent shoots some analysts are anticipating a contraction in GDP during the last three months of 2011. 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. During the recent Quarterly Inflation Report he emphasised that the economy had continued to weaken. 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 Mervyn defended the MPC's decision to print money in October by stating that the UK economic recovery is off-track. Furthermore the MPC has come under recent criticism from an ex-member for forming a 'consensus' of opinion around Mervyn King.
• UK Economic growth forecasts continue to be cut –whether it is George Osborne himself, Mervyn King or organisations such as the British Chambers of Commerce growth forecasts for the UK are being cut, suggesting that the recovery is more fragile and has run out of steam.
• The stock markets have crashed and remain volatile - amid concerns of an impending banking crisis. It would be a brave person who voted for an interest rate rise in conditions