Interest rates predictions: When will the UK bank rate rise again?
Last updated at 5:25 PM on 8th September 2011
We wish we could give an exact forecast on what next for the UK base rate, but we can't. We CAN, however, arm you with the right information and views from those in the know so you can make your own call (this round-up is updated every few days).
Essential reading:
Commentary from This is Money Editor Andrew Oxlade:
The MPC's latest decision was 'hold' today and a rise looks a long way off. In fact, the focus has turned back on to whether the Bank of England will return to money printing.
News that the ONS has not revised growth figures upwards from a weak 0.2 per cent makes it yet more likely that rates will be staying on hold for longer.The MPC voted 9-0 in favour of holding rates in August. The vote had been locked at 7-2 for two months and was 6-3 before that.
That shift reflects the remarkable and rapid movement in forecasts for rates over the summer, with predictions for the first rise, week by week, taking huge strides into the future.In June, the prediction had been for an increase in July or August 2012. And earlier this year, futures markets were even indicating at one point that a rate rise was imminent.
But by the start of August, futures markets were pencilling in early 2013 for the first increase. Now, following the massive stock market turbulence and government debt fears, markets suggest the first rise will be in late 2014.
MPC voting: The committee minutes from the June meeting showed the balance shifted from a 6-3 vote to 7-2 in favour of no rise. That was due to the replacement of arch-hawk Andrew Sentence with Ben Broadbent on the MPC (more on this below).
Then it shifted to 9-0 in August as 'hawks' Spencer Dale and Martin Weale joined other policymakers in voting for no change.
View from the Editor
The counter argument to frozen rates is that inflation - at 4.4 per cent in July (16 August) and above its 2 per cent target - is a problem and should be tackled.
There was a warning from the OECD that rate rises must happen in 2011 (25 May) to avoid inflation becoming 'embedded' in the economy.
But the over-arching mood is that the economic recovery remains weak, making it difficult to hike the cost of borrowing: official figures in late July revealed that the economy's growth had slowed to just 0.2 per cent.
It's also worth noting that in the US, the Fed Reserve has said (August 9) it expects its key rate to remain at rock bottom (it's in a 0-0.25 per cent range) until 2013.
Long-term readers of this page will know we've warned for several years that rates would remain low for a long spell - and that readers should beware of false dawns on rising rates; we've seen many (see below).
We stand by that position. The prospects for the economy remain so poor [Why we face a decade of trouble] that the MPC will be nervous about raising rates in 2011, even if inflation remains high.
The one signal that the MPC may not be able to resist is a rash of pay rises. If such a trend gathers pace, it would spark more price pressure and possibly begin an inflationary spiral. This graph shows how salaries fell in the recession and - for now - remain subdued. Official figures and anecdotal research (5 May) show no sign of significant rises in pay. Going into September, there's still no indication that pay demands are on the rise. One study suggested wages for most workers had remained frozen throughout 2011 (3 August). Vocalink's latest pay study - reliable data based on take home wages paid into bank accounts - showed a fall from 2.9% (July) to 2.7% (Aug).
So for now, rate rises look like a distant prospect. That is now, finally, being reflected properly by money markets.
Rate rise predictions: Money markets and economists
Mainstream forecasts for the first rise range between summer 2011 to early 2012. See economists' views below.
Swap markets reflect the City's bank rate expectations - not in an exact way, but they indicate trends in forecasting.
I've listed some historic swap rate prices (all taken mid-morning unless stated) and charts below to show how the market moves as economic prospects shift.
2 August
1.16% - one year
1.27% - two years
2.00% - five years
11 August
1.10% - one year
1.12% - two years
1.73% - five years
18 August
1.16% - one year
1.19% - two years
1.73% - five years
5 September
1.22% - one year
1.21% - two years
1.72% - five years
8 September
1.20% - one year
1.21% - two years
1.71% - five years
One-year swap rates (which influence one-year fixed-rate bonds)
Five-year swaps (influences 5-yr savings bonds and fixed mortgages)
View from an economist
How rate rise forecasts changed
Forecasts for the first rate rise were constantly put back throughout 2009 and 2010 and have fluctuated in 2011. Last autumn, with the recovery weakening and austerity measures ahead, attention had turned to the prospect of the Bank of England printing more money to head off deflation [read more on QE2].
But then official figures showed the economy unexpectedly racing along in late summer and MPC inflation-hawk Andrew Sentance said rates might have to rise sooner than expected.
The MPC's decision not to order further QE in November boosted hopes for the economy, which made a rate rise marginally more likely according to interest rates futures market, known as 'swaps'. These markets continued to price in a greater chance of a rate rise (see the charts above) in early 2011 but fears for Western economies kicked that view into touch by May 2011.
More analysis:
What it all means for mortgage rates
What it all means for savings rates
What next for the economy?
Beware false dawns
In early 2010, markets prematurely began pricing in a greater chance of rate rises because of rising UK inflation. They did the same again in early 2011. But as we've repeatedly argued on this round-up, defl
More: How rate rise hopes dried up last year
What decides rates?
The BoE's Monetary Policy Committee meets once a month and sets the bank rate. Its government-set task is to keep inflation below 2% (and above 1%), looking two years ahead. So if inflation looks likely to pick up, it raises rates.
Viewpoint 1: Why rates WILL rise
The 'inflation nutters' (not my words but those of BoE M
One popular theory is that Western governments want to create inflation to try and erode their record debts, created in part by bailing out banks. Billionaire Warren Buffett (right) warned about this in August 2009 well ahead of the pack (as usual).
One controversial economist has warned inflation would hold and that the MPC will be forced into a series of rate rises, taking the bank rate to 8% by 2012. That's now looking very unlikely.
Why legendary investor Warren Buffett was among the first to warn on inflation
Weak sterling has also added inflationary pressure: falls in the pound make it more expensive for Brits to buy foreign goods, effectively importing inflation. [what next for the pound?] And there's always the danger that we could import inflation from booming China.
Viewpoint 2: Why rates won't rise
On the reverse of the coin, experts have argued that the economy is so weak that rates need to be kept low for the foreseeable future. [More on that view - 14 March].
The wait-and-see position has been taken by Mervyn King and most of the MPC since the spring of 2009. Several prominent forecasters agree. The ITEM Club repeated its view in July 2010, and again in January 2011, suggesting rates will remain on hold until 2014. And the CEBR has long said the first rate rise won't come until 2012.
In April 2010, leading economist Roger Bootle actually argued for a CUT in rates to 0% (more below).
More is explained here: Why rates may remain below 1% until 2015.
We have also argued for several years on this round-up that readers should beware of false dawns on rising rates and that low rates were here to stay for a long spell.
And then there's rate rises without a rate rise...
If state debts are viewed as unaffordable, it pushes up gilt yields - the interest rates markets charge the government for borrowing - and wider rates expectations. Such a scenario could create the possibility of British consumer rates rising even without a bank rate increase: read more.
...and don't forget the Taylor Rule
A popular formula for calculating a correct central bank rate is the Taylor Rule [Wikipedia definition]. It, rightly, showed US and UK rates running too high through the Noughties. Now it suggests the UK bank rate should be raised rapidly. But critics argue it doesn't take all factors into account, such as the recent sterling slump. This commentary from a Lloyds economist is worth a read. Chris Dillow on investorschronicle.co.uk explains why the Taylor Rule's suggested 4% bank rate doesn't apply now.
| |
Bank rate | Suggested rate |
|---|---|---|
| Source: Lloyds TSB Financial Markets | ||
| UK | 0.5% | 4.2% |
| US | 0-0.25% | -1.3% |
| Euro | 1% | -2.1% |
Inflation and rates
Official data has shown inflation beating expectations more often than not in the the past two years (Figures marked with a star are when inflation was higher than forecast, with the forecast in brackets):
CPI inflation history (and expectations)
September 3.1% (3.1%)
October 3.2% (3.1%)*
November 3.3% (3.2%)*
December 3.7% (3.4%)*
January 4.0% (4.0%)
February 4.4% (4.2%)*
March 4.0%
April 4.5% (4.2)*
May 4.5% (4.5%)
June 4.2% (4.4%)
July 4.4% (4.3%)*
See a longer history of inflation
READ MORE:
- Countries with rates already rising
- Respected NIE
- One City star on why rates should stay at 0.5%
- Economists: 'Interest rates up post-October 2011'
- 'Why a interest rate rise won't instantly hike mortgages'
- Rates to hit 5% - M
- Rates at 8%? History tells us it could happen
- CB
- How inflation affects interest rates
- The BoE wants to scare you about rate rises
- What the recovery means for rates
- Why rates will remain low
- Lending rates could rise WITHOUT a bank ra
- Industry experts give Money Mail their 2010 rates predictions
- Rate rise by March? Bank Governor's hints suggest not
- BoE threatens rate rises - but would it really?
- The new inflation danger
More on QE:
- Why Warren Buffett is worried QE will spark inflation
- Q&A: What is quantitative easing and will it work?
- 'Why doesn't the Bank print money and give it to me?'
- UK bas
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To carston close, If I were you I would save a little cash towards the inevitable rise in interest rates which will affect you one way or another else you will be moaning about others who have saved and will benefit from the rate rise whilst you won't be able to take all those holidays and have nice new cars let alone eat!!
- jean, pennington hants, 09/9/2011 00:06
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