UPDATED 07/07/2011 – The latest interst rate prediction (July) can be found here.
Where next for interest rates?
What’s happened since last month’s interest rate prediction?
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 22nd month in a row.
MPC member Andrew Sentence, once again, broke ranks and voted for a rate rise (the 4th time in a row). Yet again he was a lone voice. However, even Mr Sentance is calling for control when rates eventually rise (he currently believes rates should go up to 0.75%).
But what about inflation and the economic outlook – often indicators as to when rates may rise?
”The Bank of England’s quarterly Inflation Report [was presented on 25th November and painted] a similar picture to that presented in August’s [report]” This picture includes the prospect of a choppy recovery as well as the potential for more quantitative easing. Elsewhere in the report, ”the near-term inflation profile [was] revised up reflecting stronger import and commodity prices”” (the Guardian).
Indeed, the CPI [consumer price index] increased to 3.3% in November adding fuel to the fire for those demanding a hike in interest rates. Also, the new year 2.5% increase in VAT means that inflation will keep rising in the short term, calling into question the banks credibility at keeping price rises under control. This led to the Confederation of British Industry (CBI) claiming that inflation would force the Bank of England to raise interest rates this Spring (but they made a similar prediction at the end of 2009 which turned out to be completely wrong!).
However, in December the Office for National Statistics announced that unemployment has increased to 2.5 million. Meanwhile research by housing charity Shelter claims that two million people are using their credit card to pay their mortgages, up 50 percent in a year. An interest rate rise would spell disaster for these people and the housing market. On top of that the UK’s GDP figure for the third quarter of 2010 was revised down indicating that while the economic recovery is going well, we are not out of the woods yet.
It’s going to be a tough decision.
So when will interest rates rise?
The latest Reuters poll of 67 economists shows that the market expects interest rates to not rise until October. Even then they only expect rates to hit 0.75% by the end of the year and head to around 1% in early 2012.
The Money to the Masses Interest Rate Clock time is changing
As regular readers will know our interest rate clock sums up a lot of economic data, analysis and opinion, such as the above, and if a jump in interest rates is looking increasingly likely then the clock time will be moved closer to midnight. If it looks less likely then it will move away from midnight (with 23.45 being an expectation of an interest rate drop).
Now this month’s clock time is a bit more tricky than usual. Since the last MPC meeting inflation has gone up again and the VAT rise will only add to the problem. The economic recovery still seems to be spluttering along. Current and former MPC members (admittedly only a couple) seem to be making noise about rates going up.
For me there seems to be slightly more upward pressure on interest rates than there was last month and for that reason I’m winding the clock forward a bit to 23.54.
The historic clock time adjustments are listed below to give you an idea of how my expectation of an interest rate rise has changed over time:
- May 2010 – 23:55
- July 2010 – 23.54
- September 2010 – 23.53
- January 2011 – 23.54
Finally, if you want to know if now is a good time to fix your mortgage – view my article to fix or not to fix? – That is the question.