Update 20/01/11 : click here for the Latest interest rate predictions updated monthly.
(The article set out below was originally published back in October 2010 - click on the above link to see the most recent 'interest rate prediction' article )
Where next for interest rates?
What’s happened since last month’s interest rate prediction?
Since September’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 3rd 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.
This is 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 he 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.
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 and if anything the expectation of an interest rate rise has probably receded somewhat.
A cooling global economy and an impending austerity 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.
So where does this all leave us…..
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