UPDATE 5th September 2012 – This article relates to August 2012. Click here for the latest interest rate predictions
So when will interest rates go up?
Amazingly markets now think that the UK base rate is more likely to fall than rise! The market’s view is that interest rates will fall to 0.25% in November before rising back to 0.5% in the first quarter of 2016. In fact the market is pricing in rates to remain at or below 0.5% until late 2017. To put this into context, in September the market's view of when rates would rise centred around mid 2012 . And just last month the market consensus was for the first rate rise to be in late 2016.
But why is a rate rise looking less likely?
- NO official support for a rate rise – 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 40th month in a row.
- But a cut in the bank base rate is possible! - the Committee again discussed the possibility of cutting the base rate to just 0.25% this month. Such is the level of concern over the UK economy that even the head of the International Monetary Fund called for the Bank of England to not only print more money but also to cut interest rates further. Markets reacted to all this by pricing in a possible rate cut by the end of the year.
- Inflation remains high yet fell – to 2.4% in June from 2.8% in May. 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.
- The UK recession has got worse – The UK was already officially in recession but the UK economy contracted by a further 0.7% in the 3 months to June. This took everyone by surprise and shows how desperate things have got. This will inevitably deter the MPC from raising rates and some analysts think a rate cut is more likely. Last month the Bank of England even took to printing £50bn more money (aka Quantitative Easing) to try and boost the economy. To fund out how this will affect you read my article - Quantitative Easing explained and how it could affect you.
- Unemployment fell – The number of UK unemployed fell by 65,000 in the 3 months to May. The total number of unemployed now stands at 2.58 million and the unemployment rate sits at 8.1%. In theory a stable growing economy, will keep a lid on unemployment, and be more conducive to a rise in interest rates.
- Any signs of green shoots? – As the UK GDP figures disappointed there was little sign of any green shoots emerging, in fact it is unlikely that the UK will see any economic growth in 2012. The latest economic indicators are set to be released this week and are expected to show the construction and manufacturing sectors have contracted further while the all important services sector (which accounts for around 75% of our economic output) grew modestly.
- UK Economic growth forecasts continue to be cut – be it the British Chamber of Commerce or the Bank of England themselves. 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. 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.
So should you rush to fix your mortgage now why rates are low?
Luckily I’ve answered this question in my article Should you fix your mortgage now? But if you want more help then you can click on the button below.
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