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When will interest rates go up?
Market expectations of when the Bank of England will increase its base rate have pretty much remained unchanged over the last month. Expectations for the first rate rise to 0.75% still centre around mid 2016.
But why are rates still not expected to rise soon?
- NO official support for a rate rise – 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%. The base rate has been stuck at 0.5% for over 4 years now. But despite the MPC previously debating the possibility of a negative base rate this eventuality is increasingly unlikely. This extraordinary measure would mean that some financial institutions would actually have to pay to deposit money with the Bank of England, which would hopefully encourage more lending to businesses and households instead.
- Inflation is proving troublesome – the official measure of UK inflation jumped to 2.9% in June up from 2.7% in May continuing the recent upward trend we’ve seen this summer. Don’t forget that the Bank of England’s target inflation rate is 2% (with anything above 3% getting them a slapped wrist from the Chancellor). To combat inflation interest rates are usually increased.
- The UK economy is growing again – last month the Office of National Statistics gave us the news that the UK in fact never experienced a double dip recession. Even better news is that the first quarter of 2013′s economic growth figure of 0.3% was surpassed by a 0.6% growth number in the second quarter (in line with expectations) . This is good news although a growing economy increases the prospect of a rate rise.
- There’s optimism about future economic growth - be it the UK services, manufacturing or construction sectors data has pointed to improved signs of economic recovery. Importantly the services sector, which accounts for about 75% of the economy grew at its fastest rate in more than two years last month. It may be too early to call it ‘green shoots’ but the markets certainly think that a normalisation of interest rates will now occur sooner than previously thought earlier this year.
- Unemployment has stopped growing – The number of people out of work fell by 57,000 to 2.51 million in the three months to the end of May, bucking the recent trend of rising unemployment. The UK unemployment rate still sits at 7.8%. In theory a stable growing economy, will keep a lid on unemployment, and be more conducive to a rise in interest rates. The latest unemployment figures could be better so an imminent interest rate rise seems increasingly unlikely.
- UK economic growth forecasts still disappoint but are being upgraded – such is the muted optimism for UK economic growth that the International Monetary Fund (IMF) upgraded its UK GDP forecast for 2013 from 0.7% to 0.9%. What makes this even more significant is that the upgrade was made at the same time as downgraded forecasts were made for other economies including the US.
- There’s a new Governor in town – Mervyn King, is the guy who previously headed up the group of people who set the bank base rate, has retired from his post. Now Mark Carney is the new Governor of the Bank of England and like his predecessor will probably be opposed to an interest rate until there is clearer evidence that the economy is growing and that unemployment is falling. Neither box has yet been ticked but watch this space. Carney is unlikely to rock the boat as he starts his new job so there is a good chance that interest rates will remain lower for longer and he might even dust off the money printing presses. In fact there is much talk of Mr Carney introducing ‘forward guidance’ for markets on where interest rates are likely to be headed, in order to manage expectations.
So should you rush to fix your mortgage now while rates are low?
Fortunately I’ve answered this question in my post ‘Should you fix your mortgage rate now?‘ But if you want more help or advice then you can contact Dean Mason, a qualified mortgage adviser, by clicking on the green button below.
