This post relates to July 2013, for the latest predictions and analysis click here
So when will interest rates go up?
Well it's probably been the most frantic month in a long time when it comes to the market's expectation of when the Bank of England will increase its base rate. Expectations for the first rate rise have settled back to mid 2016, but at one point last week the first rate rise was being pencilled in for 2015 as markets fretted about the impact of the US stopping printing money.
But why are rates still not expected to rise soon?
- 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%. The base rate has been stuck at 0.5% for over 4 years now. But despite the MPC previously debating the possibility of a negative base rate this eventuality is increasingly unlikely. 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.
- Inflation is proving sticky – unexpectedly the official measure of UK inflation jumped from 2.4% in April to 2.7% in May and is expected to rise again this summer. To combat inflation interest rates are usually increased. Despite the recent respite from inflation the Bank of England still thinks that inflation will remain above its 2% target until 2016.
- The UK economy avoided a triple dip recession and in fact never had a double dip recession – The Office of National Statistics has revised its previous GDP figures (a measure of economic growth) and confirmed that the UK in fact never experienced a double dip recession and the economy grew in the first quarter of 2013 by 0.3%. This is good news although a growing economy increases the prospect of a rate rise.
- There's optimism about future economic growth - be it the UK services, manufacturing or construction sectors data has pointed to improved signs of economic recovery. Importantly the services sector, which accounts for about 75% of the economy grew at its fastest rate in more than two years last month. It may be too early to call it 'green shoots' but the markets certainly think that a normalisation of interest rates will now occur sooner than previously thought earlier this year.
- Unemployment has stopped growing – The number of people out of work fell by 5,000 to 2.51 million in the three months to the end of April, bucking the recent trend of rising unemployment. The UK unemployment rate still 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. The latest unemployment figures could be better so an imminent interest rate rise seems increasingly unlikely.
- UK economic growth forecasts still disappoint but are less pessimistic – for example the British Chamber of Commerce has just upgraded its UK GDP forecast for 2013 from 0.6% to 0.9%.
- There's a new Governor in town – Mervyn King, is the guy who previously headed up the group of people who set the bank base rate, has retired from his post. Now Mark Carney is the new Governor of the Bank of England and like his predecessor will probably be opposed to an interest rate until there is clearer evidence that the economy is growing and that unemployment and the interest rates actually paid by consumers are falling. All three of these boxes have yet to be ticked and are unlikely to be any time soon. But watch this space. Carney is unlikely to rock the boat as he starts his new job so there is a good chance that interest rates will remain lower for longer and he might even dust off the money printing presses.
So should you rush to fix your mortgage now while rates are low?
Fortunately I've answered this question in my post 'Should you fix your mortgage rate now?' But if you want more help or advice then you can contact Dean Mason, a qualified mortgage adviser, by clicking on the green button below.