Where next for interest rates?
What’s happened since last month’s interest rate prediction?
Since October's interest rate prediction more water has passed under the bridge.
For starters the 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%. Once again, MPC member Andrew Sentance broke ranks and voted for a rate rise (the 4th time in a row) and 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%).
During September economic figures seemed to show that the UK recovery could be running out of steam and unsurprisingly consumer confidence sank, along with mortgage lending figures. Accordingly Adam Posen, a member of the MPC called for the Bank of England to kick-start the money printing presses in a bid to stave of deflation and keep the recovery alive.
However, the latest set of GDP figures, released in October, showed that the economy grew unexpectedly by 0.8% between July and September which was great news for the 'rate hikers' out there. But as I stated in my post UK Economy grows faster than expected – but should you care about GDP?' to claim that we have avoided a double-dip recession is premature especially given that the coalition's public spending cuts, which helped buoy the GDP figure, have yet to get fully under way.
This again all comes on the back of August’s Quarterly Inflation Report in which the governor of the Bank of England (BOE), Mervyn King, stated that the UK economy faces a “choppy recovery” over the next two years. Despite predicting lower economic growth and higher than anticipated inflation King claimed that inflation is still expected to fall back below the Bank’s 2% target within two years without the need to raise interest rates. This will in part be due to January 2011’s VAT increase having dropped out of the inflation calculations by then. But Interest rates will have to rise “aggressively” if the Bank of England loses its credibility on controlling inflation, its chief economist Spencer Dale warned on the 26th September.
But the MPC may not be able to ramp up rates in order to maintain its credibility. This is because almost three million homeowners would struggle to pay their mortgage if interest rates rose by just 2 percentage points, according to figures from the Council of Mortgage Lenders (CML) . That equates to more than one in three (37pc) of all mortgage holders. So if these figures are accurate the MPC won’t be raising interest rates in a hurry.
As ever there are always voices calling/predicting rate rises. Recent noises have come from an influential think tank warning that rampant inflation could lead to interest rates hitting 8% by 2012.
So when will interest rates rise?
The consensus view has not changed a great deal since last month. A cooling global economy and an public sector spending squeeze in Britain will make the Bank of England wait well into next year before hiking interest rates, a Reuters poll of 60 economists claimed on 1st September.
‘’A median of forecasts showed the UK central bank would begin hiking its base rate by the end of the second quarter of 2011, starting with a 25 basis point rise from its present record low of 0.5 percent, unchanged from last month’s poll.
But for the first time this year, no economist thought Bank would raise rates before the end of 2010 — something considered a foregone conclusion in polls conducted this time last year.’’ (source Reuters)
This change in expectations has obviously been reflected in swap market rates in the City.
The Money to the Masses Interest Rate Clock time will remain on hold for now
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).
So after much analysis and debate we are going to leave the clock time at 23:53 for now. Obviously the situation could change at a drop of a hat so keep clock watching.
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