Latest interest rate predictions – February 2011

UPDATED 07/07/2011 – The latest interst rate prediction (July) can be found here.

Where next for interest rates?

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

The short answer is a lot:

• Rates remained 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 23^rd month in a row.
• Increasing support for a rate rise - for the first time 2 members of the MPC voted for a rate rise.
• Inflation is getting worse – December’s inflation measure (called CPI) was 3.7% which was well above the expected 3.4%. High inflation could derail an economic recovery. To combat inflation interest rates are usually increased.
• VAT went up – in simple terms this will make the cost of a lot of goods and services more expensive which will drive up inflation further. Given that this is the main reason why interest rates will be increased it is a concern for borrowers.
• The economy is shrinking again – economic growth as measured by Gross Domestic Product (GDP) was negative in the last quarter of last year. This was completely unexpected and means that the economic recovery is even more fragile than first feared. However, these figures are basically guesstimates and will be reviewed over the next couple of months, so it may turn out that things aren’t as bad as first feared. But the upshot is that if the economy is in a bad way (rising unemployment etc) increasing rates could tip personal finances over the edge and spell disaster. So this could put off the MPC from raising rates.
• Unemployment is still on the rise – now at 2.5million. Never a good thing.
• Some green shoots – but in the last few days there has been some positive news on the state of the service sector (which is the most influential sector in the UK economy).
• Mervyn King is not panicking – Mervyn King, the guy who heads up the group of people who sets the bank base rate is sticking to his guns on the path of inflation and the economic recovery. Old Mervyn has been an advocate of keeping rates at 0.5% as he pretty much thinks everything will sort itself out in the end.
• More people are calling for a rate increase – more and more noises are being made about the need for a rate rise including by the shadow MPC. But then they would disagree with what the real MPC are doing as that’s what they are there for.

So when will interest rates rise?

This month has been the most interesting when it comes to where interest rates are going. The market’s views on when the first rate rise will be has been see-sawing from the end of the year to May (where it is now). The markets are even pricing in a 20% chance of a rate rise today.

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 you can ignore all the waffle and just concentrate on the clock time.

Now this month’s clock has been the trickiest one to call since the clock’s inception. Swathes of good and bad economic data have got markets in a jitter. But just last month I wound the clock forward (indicating an increasing chance of a rate rise) before everyone else started talking of imminent rate rises. So I must know what I’m talking about.

For me there seems to be even more upward pressure on interest rates this month than there was last month and for that reason I’m winding the clock forward to 23.56. That’s the biggest jump since I’ve started my rate predictions almost a year ago. Increasing inflation (and the VAT hike which has yet to be felt) is making me nervous and soon people will start demanding higher wages when the economy’s recovery is more stable. I’m already witnessing that in day-to-day life. And that’s when the problems will start as inflation will get out of control (rising wage costs will have to factored into the price of goods). The new clock time is indicative of the fact that I believe a rate rise is more imminent now than at any time over the last year.

The historic clock time adjustments are listed below to give you an idea of how my expectation of an interest rate rise has changed over time:

• May 2010 – 23:55
• July 2010 – 23.54
• September 2010 – 23.53
• January 2011 – 23.54
• Feb 2011 – 23.56

Should you rush to fix your mortgage now?

Luckily I’ve answered this question in my article Reader’s Question: Should I fix my mortgage now?