12 Dec 2014

Analysis: When will interest rates rise?

Analysis: When will interest rates rise?

 

Grant Morrice, Independent Financial Adviser, explores the question- when will interest rates rise?

Currently, the historical low of the Bank of England base rate has meant good news for borrowers but not great news for savers, who have been forced to look elsewhere for a “decent” return. Just how long can it be before the Monetary Policy Committee (MPC) decides to increase interest rates? Let’s explore this question in more detail.

In recent weeks a series of senior policy makers at the Bank of England have called for interest rates to remain low for longer. This is because the majority of worker’s wage prospects appear to have been permanently damaged by the recession. This will further dampen any prospects that savers and pensioners have of improved returns, however, it does spell good news for families with mortgages and credit card debts, who may be pushed too far with an interest rate rise.

There are, obviously, many factors to consider when debating any timing of a rate rise, but I will summarise a few key areas that could affect the decision of the MPC.

Inflation

Consumer prices index inflation dropped to 1.2% in September, the Office for National Statistics (ONS) reported, compared to 1.5% the month before. Inflation has been dragged down by food and fuel prices, the ONS said that if these were removed inflation would be a third higher.

Wages and Unemployment

Unemployment dropped again for the three months to August, with the latest figures recording a rate of just 6% - the lowest level since late 2008.

The ONS said that total average weekly earnings rose 0.7% in the year to August, regular pay, which strips out bonuses, rose 0.9%.

Growth

Britain's growth is still robust and among the best in the developed world, but there are concerns that a slowdown may be on the horizon.

British manufacturing grew at the slowest rate in 17 months in September as demand weakened at home and in Europe.

The above are a mere three of the many and extensive areas of the macroeconomic factors that the MPC will take into account, when deciding upon any change in interest rate. However, this year alone Mark Carney, Governor of the Bank of England, had indicated that rates would rise in spring 2015, before then suggesting they could increase this Autumn and now his deputy, Sir John Cunliffe has stated rates could remain low “for longer than previously thought”. Some economists are now saying it could be next November for a rate rise, while others say 2016 looks more likely.

Conclusions

So, in answer to our original question, it is impossible to know with absolute certainty, when the interest rate will rise, although by recent developments, it would appear this is not imminent. This is perhaps not great news for savers, for them it is perhaps more important than ever to seek professional advice or risk continuing with poor returns, and for borrowers the need to keep an eye on the rate they paying on debts is of paramount importance.

Grant Morrice, Independent Financial Adviser

@AC_GrantM



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