Where next for interest rates? – August 2010

4 min Read Published: 04 Aug 2010

The latest interest rate predictions.

 

What’s happened since last month’s interest rate prediction?

Since July’s interest rate prediction a lot 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%. And once again, MPC member Andrew Sentance broke ranks and voted for a rate rise. But yet again he was a lone voice.

Then Peter Spence, chief economist at Ernst & Young, threw his hat in the ring with a report speculating that interest rates could be held at their current rate until 2013. But this is assuming that the coalition’s budget cuts actually materialize – which is a hell of an assumption in itself.

Then Mervyn King, the Governor of the Bank of England and member of the MPC, got in on the act suggesting that interest rates could remain low for the foreseeable future.

However, on the flip side unexpectedly good economic growth figures raised hopes of a sustained recovery and consequently the potential for interest rate hikes sooner rather than later. Inflation is still well above the government’s 2% target (CPI is at 3.2%) and today two ex-Bank of England officials warn that interest rates will rise quicker than anyone expects

So when will interest rates rise?

The consensus view is that inflation will now not fall back in line with governmental targets until the back-end of 2011, partly due to the proposed 2% VAT increase planned in January. But Mervyn King suggested that rather than applying the brakes the likelihood is that more stimulus could be needed to support the recovery. An indication that he at least doesn’t envisage a rate hike soon.

Also, even though UK economic growth figures were better than expected the word ‘double-dip’ has not gone away. The EU bank stress tests were largely considered a PR exercise rather than being of any real value and while our banks are reporting returns to profit a lot of economic fundamentals have not changed. This is reflected by the results of a Reuters’ poll of leading economists who feel the 1.1% second quarter UK GDP figure is a statistical outlier. In fact, they don’t foresee a rate rise until the second quarter of 2011. In addition, the money markets are now factoring a reduced chance of interest rate rise compared to this time last month

So where does this all leave us…..

The Money to the Masses Interest Rate Clock time is on hold

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 the time will remain unchanged at 23:54. The fundamentals have not improved since last month and opinion seems to be moving away from rate rises to simply ‘more of the same’ with respect to interest rates. If anything our decision was more about whether to move the clock time further back or not, and it was a close call.

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.

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