UPDATE: This post relates to March 2013. For the latest interest rate predictions click here.
So when will interest rates go up?
One thing is now certain, the markets think a rise in the base rate is becoming an ever more distant event, especially with newspaper headlines touting the possibility of negative interest rates. Currently the market is not pricing in a interest rate rise until mid 2017 and then rates will not rise to 1.25% (the base rate is currently 0.5%) until nearer 2020!
But why is a rate rise looking increasingly unlikely?
- NO official support for a rate rise but could negative interest rates be on the way? – 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%. But Paul Tucker, the Deputy Governor of the Bank of England, raised the prospect of a negative base rate (!) when quizzed by MPs last week. This extraordinary measure would mean that some financial institutions would actually have to pay to deposit money with the Bank of England, which would hopefully encourage more lending to businesses and households instead.
- Inflation still proving sticky – the official measure of UK inflation remained at 2.7% in January (for the 4th month in a row). In fact the Bank of England now thinks that inflation will now remain above its 2% target until 2016. It had previously claimed it would fall below 2% within the year. To combat inflation interest rates are usually increased.
- Is the UK economy heading for a triple dip recession? – The UK economy contracted by 0.3% in the final 3 months of 2012, despite strong growth in the previous quarter. If the economy doesn't grow during the first 3 months of this year then the UK will enter its first ever triple dip recession. In theory a growing economy increases the prospect of a rate rise but the recent fragility of the UK economic recovery will remain a major deterrent.
- The UK's credit rating was downgraded - Moody's, the credit rating agency, cut the UK's credit rating from the top AAA rating to AA1. This was a result of the UK's poor growth prospects and ability to repay its debts being called into question. No one wants to become infamous for being the guy who snuffed out any economic recovery, so interest rates are certainly not going to be rising until the economy strengthens. Will the downgrade mean that rates will go up? Not in the short term although a weakening pound is likely to cause a spike in inflation at some point. If you want to find out more read my article 'How the UK credit rating downgrade affects your finances'.
- Unemployment seems to be falling – The number of people out of work fell by 14,000 to 2.5 million in the three months to December, with the number of people in work reaching a record high. The UK unemployment rate now sits at 7.8%. In theory a stable growing economy, will keep a lid on unemployment, and be more conducive to a rise in interest rates.
- UK economic growth forecasts continue to be cut – be it the Independent Office for Budget Responsibility , the Bank of England themselves or the National Institute of Economic and Social research, which now predicts that the economy will grow by just 0.7% in 2013. 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. All three of these boxes have yet to be ticked and are unlikely to be any time soon. But then again Mervyn is not going to be in the job much longer as he will be stepping down in 4 months time.
So should you rush to fix your mortgage now while rates are low?
Luckily Dean, a mortgage specialist, recently answered this question in his article "Is now the best time to remortgage?" But if you want more help or advice then you can contact Dean by clicking on the 'contact an adviser' button below.