When will interest rates rise (or in fact be cut)? – Latest predictions
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When will interest rates go up or be cut?
In summary: The Bank of England (BOE) has stated that it will keep a close eye on economic data to determine when it will next alter interest rates and depending on the type of Brexit deal secured by the UK government this could be up or down. At the start of 2020 the market placed the odds that the BOE would cut interest rates in January 2020 at just 5% on the assumption that the UK economy would pick up following the general election result. However, newly released economic data has shown economic weakness persists and the odds of an interest rate cut in January 2020 have leapt to 50%. Below I explain what you should be doing now and what will determine when interest rates will go up again.
Should you fix your mortgage rate now?
With interest rates near historic lows you should seriously consider whether to fix your mortgage now. Historically the best fixed-rate mortgage deals quickly disappear as soon as there is any sign that the BOE might raise interest rates. The BOE has already admitted that the future direction of interest rates (up or down) is uncertain but has not ruled out future rate rises. If you are wondering whether you should fix your mortgage rate now then reading the rest of this article will help you decide. However, the simplest route, which I’d strongly recommend, is to speak to a mortgage adviser. If you don’t know a mortgage adviser whose opinion you trust, then follow these simple steps to get a free mortgage review in 30 seconds from a vetted FCA regulated mortgage professional:
- Click the link above
- Answer the four quick questions about your situation
- Enter your email etc
- Then select the “Review my Mortgage” button
It’s as easy as that. Then an expert mortgage adviser will check if you are eligible to remortgage for free and with no obligation. They will also tell you precisely how much you could save. Typically the free remortgage check saves people around £80 per month per £100,000 of mortgage.
How the Bank of England base rate is set
The forecasting of the Bank of England base rate has been transformed in recent years. First of all when Mark Carney, the Governor of the Bank of England (BOE), took the job he issued new ‘forward guidance’ on when the Bank of England will raise interest rates or reduce interest rates.
This was a policy which he employed during his previous role in Canada’s Central Bank to try and control the market’s expectations of when interest rates will rise. The reason for doing this is that an expectation of a rate rise is as important as the actual rate rise itself. If a market thinks that the BOE will increase rates then the cost of borrowing throughout the economy will rise. This can prove damaging for a stuttering economic recovery, meanwhile artificially low interest rates also make cash deposits unattractive, which in turn boosts consumer and corporate spending.
Mark Carney originally created a notional link between the UK unemployment rate and the BOE base rate. In a pledge to keep rates lower for longer Mark Carney said that rates would not rise until UK unemployment fell below 7%. But this threshold was hit, somewhat unexpectedly, so Mark Carney had to ditch the unemployment trigger when it looked like a breach was imminent, instead replacing it with 18 economic indicators.
Then in August 2015 there was a change to the way the Bank of England communicated its view on when interest rates will go up or be cut. Historically, on the first Thursday of every month the Bank of England announced its decision on the base rate. However, it did not release the meeting minutes until two weeks later. It is these minutes that investment markets scrutinise for any hints of when rates might go up in the future. For example, they would see how many of the 9 person committee voted for interest rates to go up, down or stay the same. However, from August 2015 both the interest rate decision and the minutes were released on the same day (dubbed Super Thursday by the press). This means that there is now even greater transparency from the Bank of England surrounding their interest rate decision. So the upshot is that if you are at all concerned about when interest rates will rise or be cut you need to keep an eye on the news typically on the first Thursday of each month.
When does the market think mortgage rates will next rise or be cut?
Mark Carney has moved the goal posts numerous times on when interest rates will likely go up. Of course, when interest rates rise or fall mortgage rates will follow suit. Below is a short potted history of the latest views:
- After much speculation that interest rates would finally go up in 2015 it didn’t happen because inflation suddenly turned negative. For an economy to attain a healthy level of growth the BOE aims for an official inflation target of 2%. Raising rates tends to send inflation lower, therefore the BOE left them on hold.
- As we entered 2016 Mark Carney stated that it was not the time to raise interest rates as the UK economy was not strong enough. As a result, the expected date of the first interest rate rise moved from early 2017 to early 2020! Yet all this was prior to the UK’s EU referendum.
- The Brexit vote was a huge game-changer. The previous talk was all about when interest rates would go up. Suddenly the talk was that because the UK had decided to leave the European Union there was a chance of an economic slump, although there has been little sign of this to date. So concerned was Mark Carney and the Bank of England that they decided to cut interest rates from 0.5% to 0.25% in August 2016 and launch a new bout of Quantitative Easing (QE) to try and stimulate economic growth.
- Minutes from the August 2016 meeting stated that most members of the MPC expected another interest rate cut, possibly to 0%, before the end of 2016. This never materialised.
- Yet the UK economy has proved surprisingly resilient since the EU referendum. It led some people, even the then Prime Minister Theresa May, to suggest that the BOE overreacted when it cut interest rates.
- The fall in the value of the pound since the Brexit vote has caused inflation to increase (see later). Obviously, high inflation tends to lead to higher interest rates.
- The Bank of England was so concerned about inflation that in June 2017 it revealed that the interest rate committee (known as the MPC) almost decided to raise interest rates. This sent markets into a bit of frenzy that interest rates would go up in 2017. It didn’t help that Mark Carney and a number of his MPC colleagues hinted as much in a number of subsequent press conferences. But inflation then unexpectedly dipped as there were renewed signs of weakness in the UK’s economic growth as a result of the Brexit vote.
- The Bank of England finally raised interest rates in November 2017 for the first time in over a decade, back to 0.5%.
- But in March 2018 the Bank of England claimed that the economy had proved resilient and inflation was above target. This led to two of the nine-person rate-setting committee to vote to raise interest rates again. As it is a majority vote interest rates remained at 0.5% but were anticipated to rise in May 2018. However subsequent weak economic data in the April and May persuaded the BOE to keep the base rate unchanged at 0.5%.
- In May 2018, Mark Carney also stated that if the UK has a chaotic Brexit then interest rates may have to be cut again in the future to stabilise the economy
- Perhaps unsurprisingly in June 2018 the MPC voted to keep rates on hold. What was surprising was the fact that the vote was split 6-3 in favour of keeping rates on hold, meaning that one extra MPC member had voted for a rate hike than in previous months. This surprised the market.
- Then in August 2018 the Bank of England raised the bank base rate from 0.5% to 0.75% as expected. This was the highest level in almost a decade.
- In February 2019 the Bank of England backtracked slightly by saying that depending on economic data and the Brexit deal secured by the UK government the next move in interest rates could be up or down.
- In November 2019 the MPC voted 7-2 to keep rates on hold but the two dissenters voted for an interest rate cut.
- Finally, in January 2020 a number of MPC members hinted to the press that they were now considering voting for an interest rate cut at the next rate-setting meeting.
The indicators to watch that will determine when interest rates go up or down
Whilst the BOE is now claiming that not just one economic indicator will be used in any ‘forward guidance’ of when rates will rise or be cut, a range of them will still be used to formulate their decision. So economic indicators are still important in judging when interest and mortgage rates are likely to rise or be cut. Below is a roundup of the most important indicators to keep an eye on which will influence when interest rates go up or are cut:
So what might influence when rates rise or go down, despite the change in the BOEs ‘forward guidance’?
- Inflation has unexpectedly fallen below the official target – UK inflation fell to 1.3% for the month of December. This is the lowest level in more than three years and well below the official 2% target rate. However, this still means that the cost of living is higher than this time last year. But, if inflation keeps falling and remains below the official target the BOE may be inclined to cut interest rates, to spur economic growth and inflation.
- Official support for a rate cut is increasing – Since November 2017 the BOE has raised interest rates twice, back up to 0.75%. Over the last two years the MPC’s preferred path for interest rates was clearly for them to move steadily upwards. However, in November and December 2019 the 9-person MPC committee voted 7-2 to keep interest rates on hold but the key point is that the two dissenters voted for a cut in interest rates. It means that the next interest rate move is now more likely to be a cut rather than a rate rise.
- The UK economy has slumped – Since the Brexit referendum UK economic activity had proved surprisingly resilient although 2017 was the worst year for economic expansion since 2012. We experienced a rebound in economic growth during 2018 which continued into 2019. However, despite economic growth picking up in the first quarter of 2019, when the economy grew by 0.5%, it unexpectedly contracted in the second quarter by 0.2%. This made it the worst quarter for 7 years. Two quarters of economic contraction is the definition of a recession and there were concerns that it would be shown that the UK had entered a recession once the third quarter economic growth figures were released. As it turns out the UK avoided a recession (the UK economy grew by 0.3% in the third quarter of 2019) but it means that the annual growth rate is at its lowest pace in almost a decade. The picture hasn’t got much better with news that the UK economy contracted by 0.3% in November 2019. Weak economic growth reduces the chance of an interest rate rise (and increases the chance of a cut) but an improving growth picture would make a rate rise more likely.
- Unemployment is falling – the number of people out of work fell by 7,000 to 1.31 million in the three months to November. The UK unemployment rate now sits at 3.8% which is the lowest level in 45 years. The growth in average earnings is now 3.2%, which is way above the current rate of inflation. The BOE expects wage growth to continue to improve in the short term. If it does this could lead to inflation which would increase the chances of an interest rate rise.
- UK economic growth forecasts are being cut – The International Monetary Fund (IMF) has cut its forecasts for UK economic growth in 2019 to 1.2% (down from 1.4% last year). While at the start of November the Bank of England cut its own growth forecast for the year from 1.3% down to 1%. The BOE has warned that its assumptions are pinned on the UK securing a ‘smooth Brexit’, which is still far from guaranteed.
As mentioned in the summary earlier, the market is now pricing in a greater chance of an interest rate cut, rather than an interest rate rise in early 2020.
The new rules that could stop you remortgaging
The ability to remortgage and/or fix your mortgage has become a bit more difficult over recent years as the rules surrounding the affordability tests when applying for a mortgage were tightened slightly. Lenders always had to make sure borrowers could still afford to pay the mortgage if interest rates went up. However, if you were simply remortgaging lenders didn’t have to apply the more stringent affordability tests. Some lenders did just that which made remortgaging a bit easier. But new rules removed this option for lenders which could end up leaving some borrowers stranded on their existing deals which is why it’s important to calculate the impact of an interest rate rise and seek advice from a mortgage expert by following the steps below. It will take you a few seconds but could prevent your mortgage repayments crippling your finances in the future and help you lock into low rates while they are still available.
If you are planning on fixing your mortgage rate when interest rates do start going up further the new rules may prevent you – leaving you stranded on your existing deal with your mortgage repayments rising in line with the bank base rate or your lender’s whim.
Step 1 – Calculate the impact on your monthly mortgage payments
Quickly calculate the impact of an interest rate rise on your mortgage payments with this interest rate rise calculator. Just enter the original details of your mortgage, such as the original amount borrowed and the original term to be able to see how your monthly mortgage payments could change based on different interest rate rises.
So let’s say for example that back in 2007 I borrowed £200,000 for 30 years at a rate of 5%, which has since dropped to 2.5% (the lender’s standard variable rate). In the calculator I would enter the original loan amount (£200,000 on a repayment basis), the original term (30 years) and the current rate of interest (2.5%). The Bank of England base rate is currently 0.75%. So let’s say I want to see the impact if the base rate increased by 4.5% (to 5% – which is the historic long-term average) I just enter 4.5% into the ‘anticipated rate change’ box and click calculate.
The result shown below the interest rate rise calculator tells you that my current mortgage repayment would increase from £790 a month to £1,331 a month. That’s an extra £541 a month that I’d need to find!
Once you have the result move on to step 2 below.
Step 2 – The best way to find out your mortgage options
Consumers are unaware of the new rules and the fact they could leave some people stranded on their current deals. At best their mortgage repayments will increase in line with the Bank of England base rate, at worst at the whim of their lender.
Most consumers will wrongly assume that using a price comparison site is the best thing to do when looking to remortgage. However, bear in mind
- many mortgage deals are only available via mortgage advisers so don’t appear on price comparison sites
- not everyone can get the rates quoted on price comparison sites
- price comparison sites don’t take into account your credit rating or personal circumstances which will determine whether a lender will actually lend to you. For example you may not be eligible for the deals quoted by comparison sites and won’t find out until they credit check you. That in itself will then hinder future mortgage applications
That is why you are almost always better off dealing with an independent mortgage adviser rather than going it alone. This is why 70% of borrowers now use a mortgage adviser to find the best deal from a lender who will actually lend to them. Therefore, we recommend getting in contact with a mortgage advisor yourself. You can arrange a free remortgage review in just 30 seconds using this online tool.
If you already have an independent mortgage broker that you trust then I suggest you get in touch with them as there has never been a better time to remortgage.