Where next for interest rates? – September 2010

2 min Read Published: 08 Sep 2010

The latest interest rate predictions.

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

Since August’s interest rate prediction a bit 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 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%).

Then during the his Quarterly Inflation Report the governor of the Bank of England, 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.

On the flip side an influential think tank warned that rampant inflation could lead to interest rates hitting 8% by 2012.

So when will interest rates rise?

The consensus view is that inflation will now not fall back in line with governmental targets until 2012, partly due to the proposed 2% VAT increase planned in January.

However, all the while Mervyn King keeps moving his inflationary goal posts he offers no suggestion that rates will rise anytime soon.

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 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 23:53. It was a tight call but since we last reset the time, back in July, the expected date of an interest rate rise is seemingly further off now than it was then. 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