Latest Interest Rate Predictions – June 2012

UPDATE 3rd July 2012 – This article relates to June 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 it centred around mid 2012. But the unanimous voting at recent MPC meetings, the fact that the UK has re-entered recession and the escalating eurozone crisis has meant markets are now pricing in the first rate rise as being in the first quarter of 2016.

But why?

• 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 38th 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 yet fell – to 3% in April from 3.5% in March. 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.
• The UK economy is 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 especially as economists expect the economy to contract further in the coming months due to the various bank holidays. But rather than a rate rise even more Money Printing (aka Quantitative Easing) by the Bank of England is likely.
• Unemployment fell – The number of UK unemployed fell for the second time in a year to 2.63 million and the unemployment rate now sits at 8.2%.
• Any signs of green shoots? – As the UK GDP figures disappointed there was little sign of any green shoots emerging, in fact the original estimate for the level of economic contraction was downgraded even more. The UK services sector (a key driver of the UK economy) slowed in April along with the manufacturing and construction sectors. The latest surveys of the manufacturing and construction sectors have shown confidence is continuing to collapse. In addition, retail sales fell the most in more than two years with the poor weather and consumer caution being blamed.
• UK Economic growth forecasts continue to be cut – be it the British Chamber of Commerce or the Bank of England themselves. Raising rates would hammer consumers further and could derail any sniff of an economic recovery which would be bad news.
• Mervyn King 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 IMF are calling for a rate cut!! -such is the level of concern over the UK economy that the head of the International Monetary Fund called for the Bank of England to not only print more money but also to cut interest rates further.