UPDATE 10th May 2012 - This article relates to April 2012. Click here for the latest interest rate predictions.
So when will interest rates go up?
The market’s view on when interest rates will rise was continually pushed back throughout 2011. In September, for example, it centred around mid 2012. But the unanimous voting at the last 8 MPC meetings as well as the uncertain economic backdrop have seen markets price in the first rate rise as being in the last quarter of 2014.
- Rates remain at 0.5% – 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 36th month in a row.
- NO support for a rate rise – last month the Committee once again voted unanimously (9-0) to keep rates on hold.
- Inflation remains high but expected to keep falling – inflation fell, as expected in February (down to 3.4%). 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.
- Economic growth is weak – With the eurozone debt crisis still unravelling a global recession is likely, the UK included. But economists were caught by surprise when the initial estimate of UK growth for the last quarter of 2011 was downgraded from -0.2% to -0.3%. One more quarter of negative growth and the UK will officially be back in recession. With the UK economy in a bad way (high unemployment etc) increasing rates could tip personal finances over the edge and spell disaster. Especially as nearly half of home owners are living in fear of a rate rise. This will deter the MPC from raising rates. But rather than a rate rise even more Money Printing (aka Quantitative Easing) by the Bank of England is likely.
- Unemployment rose – The number of UK unemployed is currently 2.67 million and the unemployment rate now sits at 8.4%, the highest since 1996. And this is before the government's austerity measures fully kick in.
- Any signs of green shoots? – While the latest UK GDP figures disappointed there have been reasons for optimism. The UK services sector (a key driver of the UK economy) is growing while the manufacturing sector has returned to growth. In addition, retail sales unexpectedly steadied in March and recent surveys suggest that the UK economy should grow in the first quarter of 2012, so avoiding an official recession. The green shots have given markets (and Mervyn King) optimism that the UK economy may be in better shape than feared.
- But UK Economic growth forecasts continue to be cut –despite the green shoots some analysts are still predicting a contraction in GDP in 2012, the OECD. The British Chambers of Commerce, however, believes that the UK will avoid recession. Raising rates would hammer consumers further and could derail any sniff of an economic recovery which would be bad news.
- Mervyn King is still not panicking and 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.
- The stock markets has taken off! - Stock markets have taken off in the first quarter of this year largely due to mass money printing by the world's central banks. While confidence (misplaced?) has returned the underlying problems, such as the eurozone sovereign debt crisis, have not been resolved. So while the world may be more optimistic it is far from fixed. Any knock-on wealth effect may be short lived and national and personal finances are still stretched.
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?