UPDATE : This post relates to February 2012 for the latest interest rate predictions click here
So when will interest rates go up?
The market’s views on when interest rates will rise was continually pushed back throughout 2011. In September, for example, it centred around mid 2012. But the unanimous voting at the last 6 MPC meetings as well as the deteriorating economic backdrop have seen markets price in the first rate rise as being in the last quarter of 2014.
- 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 34th 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 2011, 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 – inflation fell by more than expected in December (down to 4.2%). 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 further in 2012, and back under the Bank of England's 2% target in the medium term.
- Economic growth is weak – With the eurozone debt crisis still unravelling a global recession is likely, the UK included. Perhaps unsurprisingly, initial estimates suggest that the UK economy contracted by 0.2% in the last quarter of 2011. One more quarter of negative growth and the UK will officially be back in recession. 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) by the Bank of England is likely as soon as this month.
- Unemployment rose – UK unemployment rose unexpectedly by 118,000 in the three months to November, to 2.69 million. The unemployment rate now sits at 8.4%, the highest since 1996. And this is before the government's austerity measures fully kick in. In November's 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? – While the latest UK GDP figures disappointed there have been reasons for optimism. In January, the UK services sector (a key driver of the UK economy) grew at it's fastest rate since March 2011. In addition, the manufacturing sector returned to growth. In fact, these green shots have given markets optimism that the UK economy may be in better shape than feared - as a result their prediction for when interest rates will rise came a bit closer (in January markets had predicted rates won't go up until 2016). But despite the green shoots some analysts are still predicting a contraction in GDP in 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. 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 or, most recently, the International Monetary Fund 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?