22 min Read
20 Apr 2017

When will interest rates rise (or in fact be cut)? – Latest predictions

bank of england

This article is continually updated to bring you the latest analysis on when interest rates are likely to rise or be cut. Sign-up to our newsletter to receive updates to your inbox.

At the bottom of this article I also tell you how to quickly calculate the impact of an interest rate rise or interest rate cut on your own monthly mortgage payments. Plus I explain why you should consider remortgaging as a new EU rule comes into effect, even though we've voted to leave the European Union, and what you need to do now.

When will interest rates go up or be cut?

In summary: A year ago the market was pricing in that the Bank of England would raise interest rates by the start of 2017. However, weak economic data, bouts of falling prices (negative inflation), concerns over the slowing global economy and the Brexit vote meant that the UK economic outlook deteriorated so much that the Bank of England actually cut interest rates from 0.5% to 0.25% in August 2016. The market had been pricing in another possible interest rate cut in 2017 until the continued weakness of the pound caused inflation to pick up, putting put paid to another rate cut. Interest rates are now expected to rise but not above 0.5% until 2019. See bullet points below for more detail. Also you can sign-up to our newsletter to receive interest rate updates to your inbox.

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Should you fix your mortgage rate now?

If you are wondering whether you should fix your mortgage rate 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 unbiased mortgage review in 60 seconds from a vetted FCA regulated mortgage professional:

  1. Click the link above
  2. Enter your email etc
  3. Select the adviser type as ‘Mortgage adviser’
  4. Select the advice as ‘remortgage’
  5. Enter the approximate size of your mortgage
  6. Then in the section titled why do you want an adviser? type ‘Free mortgage review”
  7. Make sure you select the ‘free mortgage review button that appears below the form before clicking submit

It’s as easy as that. You will then receive a free non-obligation expert mortgage review, comparing thousands of mortgages which will advise you of the best course of action.

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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. Of course for years we have been obsessed over when interest rates would go up but the next interest rate change looks likely to be downwards.

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 are 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 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 plotted 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 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. 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 has lead some people, even Prime Minster Theresa May, to suggest that the BOE overreacted when they cut interest rates.
  • The almost 20% fall in the value of the pound since the Brexit vote has caused inflation to spike (see later). In fact inflation may hit 4% next year (more than twice the official target). To give this some perspective, before the referendum the BOE was predicting that inflation would struggle to get above 2% over the next two years. Obviously high inflation tends to lead to higher interest rates.
  • Interestingly Donald Trump winning the US Election is also a bit of a worry. This is because he is promising to spend huge amounts on infrastructure leading markets to believe that it will cause inflation to rise in the US, which may in turn make its way to the UK.
  • As for when interest rates will eventually go back up it is now expected that the first interest rate rise to 0.5% will occur in 2018 and will rise again in the second half of 2019 to 0.75%. This will be followed by further 0.25% increases at regular intervals. By the end of 2020 the BOE base rate is predicted to be around 1.25%

So the current forecast is for interest rates to go up to 0.5% by 2018. 

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 jumped – in April 2015 the official measure of UK inflation fell to -0.1% (the lowest level since 1960). This has since spiked to 2.3% thanks to the post-referendum slump in the value of the pound. That means that the cost of living is higher than this time last year. The value of the pound has fallen against other currencies, for example it is now 15% lower versus the US dollar than before the EU referendum. That means all our imports have suddenly become more expensive. In time this will have a greater impact on the cost of goods in our shops which will likely push up the rate of inflation further. The BOE predicts that inflation will rise to 2.7% in 2017 while the National Institute of Economic and Social Research estimates inflation will be nearer 4%! If inflation suddenly spikes Mark Carney could be forced to raise interest rates sooner than he would like.
  • Official support for a rate rise is appearing – for years there had always been some support within the MPC for a interest rate rise. However, this changed as a result of the Brexit vote and the talk became about whether they in fact cut interest rates again. The minutes from MPC meetings in the Autumn of 2016 suggested that the BOE base rate could be cut to 0%. Their view has since changed again as inflation increased and the MPC are now more inclined to increase rates rather than cut them. In fact in the latest MPC meeting one committee member actually voted for an interest rate rise
  • The UK economy has held up since the EU referendum – the Office of National Statistics has confirmed that the UK economy grew at 0.6% during the third quarter and fourth quarters of 2016 beating expectations. Interestingly the growth wasn’t just driven by the services sector (which accounts for around 75% of the UK GDP). Construction grew by 1.8% in December while manufacturing grew 2.1%, both more than predicted. This data covers the period after the EU referendum and shows that the UK economy is proving more resilient than had been predicted. This certainly reduces the chances of another interest rate cut and instead makes an interest rate rise more likely.
  • Unemployment is falling – The number of people out of work fell by 45,000 to 1.56 million in the three months to February. The UK unemployment rate now sits at 4.7%, the lowest level in almost 42 years. This is well below the BOE’s old ‘forward guidance’ threshold and the BOE predicts it could fall as far as 4.5%. Interestingly, wage growth had exceeded inflation for some time but that is no longer the case. The growth in average earnings is now 2.3%. A lack of wage growth is a sign of slack in the economy which would make an early rate rise less likely. But wage growth is unlikely to improve in the short term.
  • UK economic growth forecasts are being revised upwards  – The Bank of England and the International Monetary Fund (IMF) both have upgraded their forecasts for UK economic growth in recent weeks. The BOE now predicts that the UK economy will grow by 2% in 2017, up from their previous forecast of 1.4%. In the aftermath of the Brexit vote the BOE had projected growth of just 0.8%

The new EU rule that could soon stop you remortgaging

The ability to remortgage and/or fix your mortgage became a bit more difficult last year as the rules surrounding the affordability tests when applying for a mortgage were tightened slightly. Lenders 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 EU rules remove this option for lenders which could end up leaving some borrowers stranded on their existing deals. This will remain the case all the time we remain in the EU, which we still are despite the EU referendum result.

If you are planning on fixing your mortgage rate when interest rates do start going up the new EU 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.

If you are on your lender’s standard variable rate then I strongly suggest you do the following exercise which 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.

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 0.5%. 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.

Interest rate calculator

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Step 2 – The best way to find out your mortgage options

Consumers are unaware of the new EU rules and the fact it will leave some 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 unbiased mortgage review in just 60 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.

Further reading – should you fix your mortgage rate now

Article overview

Key points

  • While interest rates aren’t looking like rising this year this can suddenly change. To make sure you don’t get caught out you can sign-up to our newsletter to receive the latest interest rate rise predictions.
  • There are a range of factors that the Bank of England takes into account when deciding the official bank base rate
  • These factors include inflation, employment and economic growth numbers
  • If you wait until interest rate start to go up before reviewing and fixing your mortgage interest rate the best deals will be gone and you may even get stuck on your current deal meaning your monthly payments will rise as interest rates go up.
  • To see the impact of an interest rate rise on your monthly mortgage payments use this interest rate rise calculator

Written by Damien

Damien is one of the most widely quoted money and investment experts in the national press and has made numerous radio & TV appearances. He created MoneytotheMasses.com while working in the City when he became disillusioned with the way the public were left to fend for themselves because they could not afford financial advice.

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