Latest Interest Rate Predictions – December 2011

3 min Read Published: 08 Dec 2011

bank of england 

Update 2012 - the post below relates to December 2011. For the latest interest rate predictions click here


So when will interest rates go up?

The market’s views on when the first rate rise will be has continued to be pushed back throughout 2011. In September, for example, it centred around mid 2012. But the unanimous voting at the last 4 MPC meetings as well as the deteriorating economic backdrop have seen markets price in the first rate rise as being in April/May 2015 , up from an expectation of Spring 2014 just last month.

But why?

  • Rates remain at 0.5% – last month the Bank of England’s 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%, for the 32nd month in a row.
  • NO support for a rate rise – last month the Committee once again voted unanimously (9-0) to keep rates on hold. This represents a huge change in stance, compared to earlier in the year, and means that an interest rate rise in the near future is less likely. (in July the MPC voted 7-2 to hold rates)
  • Inflation remains high but expected to fall – October's inflation measure (called the Consumer Prices Index or CPI) fell back to 5% from 5.2% the previous month. But high inflation could derail an economic recovery. To combat inflation interest rates are usually increased. Although inflation remains stubbornly high it is expected to fall back in 2012, and back under the Bank of England's 2% target in the medium term.
  • Economic growth is weak – economic growth as measured by Gross Domestic Product (GDP) was negative (-0.5%) in the last quarter of 2010. This trend was reversed when GDP grew by 0.5%  in the first 3 months of 2011 and then by 0.1% in the second quarter. GDP for the third quarter was better than expected (at 0.5)% but the economic recovery is still fragile. With the eurozone debt crisis still unravelling a global recession is likely, the UK included. With the UK economy in a bad way (high unemployment etc) increasing rates could tip personal finances over the edge and spell disaster. Especially as nearly half of home owners are living in fear of a rate rise. This will deter the MPC from raising rates. But rather than a rate rise more Money Printing (aka Quantitative Easing) is likely, even  as early as February.
  • Unemployment rose – UK unemployment rose unexpectedly by 129,000 in the three months to September, to 2.62 million - a 17 year high! And this is before the government's austerity measures fully kick in. In the recent Autumn Statement the Chancellor revised up the number of public sector jobs to be lost by 2017 from 400,000 to 710,000. Such a huge unemployment figure is never a good thing.
  • Any signs of green shoots? – As mentioned UK GDP figures for the third quarter were better than expected. But in November UK retail sales fell the most in 6 months as consumers' finances continue to be squeezed. This comes on the back of the revelation that UK families have seen the biggest fall in living standards in over 30 years and that household budgets could be squeezed for the next 10 years as the impact of tax rises and cuts filter through. Consumer spending stimulates the retail sector and helps turn the wheels of the economy. But on a positive note the UK services sector (a key driver of the UK economy) saw a pick up in activity in November. By contrast the decline in the manufacturing sector accelerated in the same month. Despite the greent shoots some analysts are anticipating a contraction in GDP going into 2012. Raising rates would hammer consumers further and could derail any sniff of an economic recovery which would be bad news.
  • Mervyn King is still not panicking and doesn't want to raise rates – Mervyn King is the guy who heads up the group of people who set the bank base rate. During the recent Quarterly Inflation Report he emphasised that the economy had continued to weaken, with the biggest threat coming from the ongoing eurozone crisis. Mervyn has previously said that there would be no rise in interest rates until there was clearer evidence that the economy was growing and that unemployment and the interest rates actually paid by consumers were falling. None of these will be happening any time soon and Mervyn defended the MPC's decision to print money in October by stating that the UK economic recovery is off-track. Furthermore the MPC has come under recent criticism from an ex-member for forming a 'consensus' of opinion around Mervyn King.
  • UK Economic growth forecasts continue to be cut –whether it is George Osborne himself, Mervyn King or organisations such as the British Chambers of Commerce growth forecasts for the UK are being cut, suggesting that the recovery is more fragile and has run out of steam. In his autumn statement the Chancellor revised down the GDP forecast for 2011 from 1.7% to 0.9%. In addition, the 2012 forecast was also revised down to 0.7% from 2.5%.
  • The stock markets remain volatile - amid concerns of an impending banking crisis, with the ongoing eurozone sovereign debt crisis being the catalyst. It would be a brave person who voted for an interest rate rise in conditions

So should you rush to fix your mortgage now why rates are low?

Luckily I’ve answered this question in my article Should you fix your mortgage now?