Where next for interest rates? – July 2010

The latest interest rate predictions.

So when will interest rates rise?

Since we launched the Money to the Masses Interest Rate Clock, in mid May, a lot has happened. For starters the Monetary Policy Committee (MPC), who are the guys who decide the UK base rate, met on 10^th June and once again voted to keep the base rate at 0.5%. However, interestingly one member of the committee broke ranks and voted for a rate rise - fortunately democracy rules. Couple this fact with Mervyn King’s (the Governor of the Bank of England) recent comments that he would raise interest rates if needed; it would appear that there is change on the wind.

Having said this, what Mervyn King actually said, but the headlines ignored, is that he would raise interest rates before he turned off the printing presses for good. Which is not the same thing as saying ‘hey sucker, you’re about to meet my friend Pain!’

If you’ve been following our Twitter feed you will have read a number of articles from eminent economic bodies calling for rates rises sooner rather than later (see my post Today’s newspapers are full of headlines about hikes in interest rates, but is this likely? And should you fix your mortgage now?)

So does this all mean that interest rates are about to soar?

Well no actually.

The main aim of the MPC is to keep inflation under 2%, which is the government’s target. Now inflation had been looking like it was going to run away for a bit but last month’s inflation figures showed a surprise fall. Consequently, the Bank of England remain confident that they’ve got this dog on a lead.

Secondly, you can not watch the news without been bombarded by the word ‘double-dip’. This is not a reference to England’s woeful performance in the World Cup (double-dip would imply they’d enjoyed an upturn at some point) but the possibility of a second recession. Whether it’s figures showing a stuttering UK housing market, disappointing US employment figures or a slowing of China’s economic growth the real fear is that we may be heading back into global recession. Hence why the stock market has tanked.

Whether we do or don’t, the fact is that while we are uncertain it is a brave man who pushes up interest rates (a recent survey by the charity Shelter suggested that five million home owners will be unable to afford an interest rate rise and will be in danger of being evicted from their homes)

Interestingly a poll by Reuters of 61 leading economists gave just a 30 percent chance of a rate hike by year-end, well down from the median 55 percent forecast in last month's poll. Median forecasts from the poll suggest the bank rate would be raised in the first quarter of next year (Jan to March 2011) to 0.75%, then to 1.0% by June and would finish the year at 2.0%.

Also a change in expectations of a rate rise has been reflected in market swap rates

A lot of people have asked what impact the Emergency Budget will have on interest rates. The answer is it doesn’t directly as the MPC decide the base rate but obviously if the proposed spending cuts don’t rescue the economy and instead plunge us into recession then interest rates are unlikely to be put up – unless the government starts printing more money to bail everyone out. However, the VAT increase set for January will increase the price of certain goods and therefore potentially boost inflation. But George Osborne has been clever in introducing the hike at the start of the year to lessen the impact on inflation figures – this is due to the way the annual rate of inflation is calculated and the fact that a similar VAT increase occurred at the start of this year. Think of it as a magician’s card trick – first you see it, now you don’t!

So where does this all leave us…..

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).

So after much analysis and debate we are going to move the clock time back to 23:54. It was a tight call but while we still believe that an interest rate hike could happen towards the end of the year it seems less certain than it did a month ago. 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 – click on the relevant link in the right hand column.