So when will interest rates go up?
UPDATE: THIS POST REFERS TO APRIL 2013. FOR THE LATEST INTEREST RATE PREDICTION CLICK HERE.
Markets now think that the date of a rate rise is slowly disappearing over the horizon. Last month the market was not pricing in a interest rate rise until mid 2017, but now they think it won't happen until the Spring of 2018.
But why is a rate rise looking increasingly unlikely?
- NO official support for a rate rise but could negative interest rates be on the way? – 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%. But Paul Tucker, the Deputy Governor of the Bank of England, recently raised the prospect of a negative base rate but this was quickly downplayed by the MPC. This extraordinary measure would mean that some financial institutions would actually have to pay to deposit money with the Bank of England, which would hopefully encourage more lending to businesses and households instead. But negative interest rates are unlikely in reality.
- Inflation still proving sticky – the official measure of UK inflation had remained at 2.7% for 4 months in a row but it crept up to 2.8% in February. The Bank of England now thinks that inflation will remain above its 2% target until 2016. It had previously claimed it would fall below 2% within the year. To combat inflation interest rates are usually increased.
- Is the UK economy heading for a triple dip recession? – The UK economy contracted by 0.3% in the final 3 months of 2012, despite strong growth in the previous quarter. If the economy doesn't grow during the first 3 months of this year then the UK will enter its first ever triple dip recession. But already there is talk that the recent cold weather will have hit consumer spending and economic growth making a triple dip almost certain. In theory a growing economy increases the prospect of a rate rise but the recent fragility of the UK economic recovery will remain a major deterrent.
- The UK's credit rating was downgraded - Moody's, the credit rating agency, cut the UK's credit rating from the top AAA rating to AA1. This was a result of the UK's poor growth prospects and ability to repay its debts being called into question. No one wants to become infamous for being the guy who snuffed out any economic recovery, so interest rates are certainly not going to be rising until the economy strengthens. Will the downgrade mean that rates will go up? Not in the short term although a weakening pound is likely to cause a spike in inflation at some point. If you want to find out more read my article 'How the UK credit rating downgrade affects your finances'.
- Unemployment has stopped falling – The number of people out of work rose by 7,000 to 2.52 million in the three months to January, bucking the previous trend of falling unemployment. The UK unemployment rate now sits at 7.8%. In theory a stable growing economy, will keep a lid on unemployment, and be more conducive to a rise in interest rates. But the latest unemployment figures are a blow, making a rate rise less likely.
- UK economic growth forecasts continue to be cut – be it by the Independent Office for Budget Responsibility (OBR) , the Bank of England themselves or the National Institute of Economic and Social research. In fact, ahead of the latest Budget the OBR cut its 2013 UK economic growth forecast to 0.6%, down from the 1.2% forecast just 3 months previously. Raising rates would hammer consumers further and could derail any sniff of an economic recovery which would be bad news.
- Mervyn King 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. All three of these boxes have yet to be ticked and are unlikely to be any time soon. But then again Mervyn is not going to be in the job much longer as he will be stepping down in 3 months time.
So should you rush to fix your mortgage now while rates are low?
Luckily Dean, a mortgage specialist, recently answered this question in his article "Is now the best time to remortgage?" But if you want more help or advice then you can contact Dean by clicking on the 'contact an adviser' button below.