First rate rise? Forecast shifts to August 2016

Two-minute briefing: Predictions have shifted again in 2015. We explain why – and what it means for mortgages and savings

Bank Rate, at 0.5pc for nearly six years, was held again last month. A rise in interest rates in 2015 is looking less likely after a sharp decline in the rate of inflation at the end of 2014.
Read the coverage in the Bank of England channel for in-depth coverage of the Bank’s latest views on the economy, which are so crucial to the anticipated timing of base rate rises. Below we cover the main points and explain what it all means for savings and mortgages.
What has changed?
In early summer last year, there was feverish speculation that the first rate rise would come in 2014. The economy was bouncing back and analysts believed the Bank Rate would need to rise to cool growth and head off inflation that might follow.
But the recovery has proved less robust than hoped and inflation has tumbled to 1pc, way below the 2pc target. [See the chart below]. Hopes of a rate rise in 2014 evapourated. HSBC, in November, pushed back its forecast for the next rate hike by a whole year, to the first quarter of 2016. It blamed a cocktail of political uncertainty, weaker inflation and an economic slowdown.

Once again, hopes that a rate rise was just months away proved to be a false dawn. Throughout the financial crisis economists have failed to grasp the vast headwinds facing Western economies and stood by forecasts that a base rate rise was around the corner. The harsh reality of Britian’s economic situation – colossal state and consumer debts and the end of an economic boom driven by baby boomers who are now retiring – could mean many more years of low rates. The global situation could also contribute further deflationary pressure. The European Union has just slipped into deflation and the plummeting oil price – it has halved since last summer – is yet to be fully registered in economies and inflation data. A currency war in Asia – policy in Japan is determinedly devaluing its currency – may export deflation on a grand scale around the world. How the market forecast changed in six months… What’s the latest predictions? The Bank Rate, at 0.5pc since March 2009, is expected to stay there until July or August 2016, according to markets. This has shifted from a forecast of March 2016 at the start of 2015. By comparison, the forecast of money markets in July was for a first increase in late 2014. This is captured in this chart from Capital Economics, which also shows how the slump in the oil price has forced a particularly sharp shift in January (based on the prediction indicated by the “overnight index swap” on money markets). The bold line is the consensus expectation of economists: Capital Economics has been one of the more accurate forecasters, accepting there would be a longer wait for rises. But it has now swung the other way, persuaded that inflaton will make a comeback (see Capital’s chart below). Vicky Redwood, chief UK economist, believes the factors behind the current deflation scare are temporary. She said: “We would not go as far as many other forecasters in judging that a rate rise this year is now totally off the agenda. And we certainly think that the markets have gone too far in pushing their expectations of the first hike all the way back to the second half of 2016. “We still have one 25bps rise pencilled in before the end of the year. That said, it remains clear that the pace of tightening will still be very slow, with policy remaining accommodative for a long time. “We continue to expect Bank Rate to have risen to only 1.25pc by the end of 2016.” So no rush to fix that mortgage? Possibly, but it’s never wise to try to call future rates accurately (as economists will tell you). The cost of fixed rates remains historically low compared with “trackers”, especially on longer-term loans, making it a simple choice: protection from rate rises at little extra premium. Industry figures show more than 90pc of those buying and remortgaging are buying fixed rates. See the latest best buy mortgages here and try the interest rate rise calculator here. And savings? That’s a more difficult decision. The best variable-rate savings account (non-Isa) pays 1.41pc, offered by National Counties, and the best two-year fixed savings rate is 2.33pc (from Secure Trust). Either way it’s a gamble, but 2.33pc may feel like a good rate if the Bank Rate still hasn’t risen by the end of 2015, which seems highly likely. One option for larger deposits is to take a high fixed rate that offers some increase if the Bank Rate rises. It’s also worth noting that when money markets price in increased chances of a rate rise, it is usually passed on with higher rates on fixed-rate savings and mortgages. Read a more in-depth analysis of saving rates in 2015.   Source:

Leave a Reply