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UK Interest Rates: The Long Term Outlook

UK Interest Rates
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At the beginning of 2016 the expectation was that December, or perhaps January of 2017, would see a rise in the UK Base Rate, with the United Kingdom expected to follow the lead of the United States, which had just announced the first rise in interest rates in nine years. However, UK interest rates have in fact fallen, and predictions have been dramatically altered by a combination of this year’s new global economic gloom, and numerous “doveish” remarks from the Monetary Policy Committee. The long term forecast is now that interest rates will not rise until at least December 2019.

Why have rate predictions changed?

A lot has changed since last summer, and has convinced markets that a rise in interest rates will now not happen for a longer period of time than was originally anticipated, including:

  • Weaker economic growth in the United Kingdom
  • Oil prices plunging
  • Stock market turbulence in the autumn and earlier this year
  • UK deflation returning in September 2015
  • Statements from the Bank of England

The Brexit vote has also become a huge influence more recently, with betting forecasts and opinion polls moving both the value of the British pound and the forecast for the next interest rate rise. Since rates were slashed to 0.5 percent seven years ago back in 2009, the trend has begun to push forecasts of a rate rise further into the future.

What do analysts think?

At the start of 2016 many commentators made somewhat rash predictions that a rate rise was imminent, after the decision in December to raise interest rates made by the United States. Those forecasts have now been moderated. Although a number of analysts have still been predicting minor rises for later this year, their views do not reflect the stance of the Bank of England’s chief economist Andy Haldane, who noted in 2015 that no convincing case has yet been made for interest rate rises, a view he has repeated and which has been echoed by others.

Mortgage issues

The cost of fixed-rate mortgages remains at a historic low, and industry statistics demonstrate that ninety percent of people mortgaging and remortgaging use fixed rates. Fixed rate deals have continued to fall in price this year and are good way to save money for people with mortgages who want to protect themselves from any possible interest rate rises.

Will rates rise quickly?

Experts are predicting only very slow increases, even once the first rise does take place, with most showing increases occurring at a much slower rate than has been seen in previous interest rate rise cycles. Some economists are anticipating a rate of 1.25 percent by the close of 2017. Market predictions have been captured by the quarterly inflation report of the Bank of England, which suggests that by the beginning of 2019 there will be a notional rate of 1 percent. In a report issued in November 2015 the market was expecting 1 percent to have been reached by the end of this year, and for it to have reached 2.3 pc by the turn of 2019.

For savers, things don’t look great, but for anyone buying a house or looking to remortgage, there does seem to be some stability to the current historically low rates.

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