Interest rates: News and predictions

| October 11, 2012 | 0 Comments

Andrew Oxlade T:@andrew_oxlade

10:28 EST, 11 October 2012

We wish we could give an exact forecast on the future of 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 with the latest shifts in interest rates futures). This is Money Editor Andrew Oxlade explains all.

Bank of England

No green shoots: The gloomy outlook for the economy could see the Bank of England keep rates on hold for the long haul

When will the Bank of England make the first move? Interest rate futures on money markets give an indication of shifting sentiment. They moved dramatically in 2011. At the extremes, they pointed to an immediate rise in spring, but by the end of the year indicated 2015 for the first increase.

In the first half of 2012, forecasts modulated between a mid-2014 and late-2015 prediction.

But the worsening turmoil in the eurozone has pushed the ‘first rise’ prediction even further into the future and led the market to expect a cut rather than a fall. It is also due to the Bank of England’s new lending plans for banks [more is explained here].

The dire GDP figures (25 July), which showed Britain’s recession was worsening and had extended from six months to nine months, merely reinforced the gloom and cemented the chances of a rate cut and the Bank governor heaped on the pessimism in his quarterly forecast in August.

The announcement of ‘QE3′ in the US in mid-September for a moment made a UK rate rise slightly more likely. But the hopes of economic revival soon dissipated – and the forecast for bank rate rises  moved further out.

Today (11 October), the money markets imply the bank
rate will be cut in April, return to 0.50% in March 2015,
rise to 0.75% in January 2017 and finally reach the dizzying
heights of 1% by December 2018.
[Don’t miss: Will rates be cut by Christmas?]

How inflation fear - and therefore the threat of rate rises - has eased in 2012

How inflation fear – and therefore the threat of rate rises – has eased in 2012

Last week, the market briefly predicted rates wouldn’t return to 1% until 2019.

This position is a huge shift from earlier this year: in spring, the market predicted a rise to 0.75% by mid-2014.

Back then, there was greater concern about inflation. The chart (right) is published by business consultancy BDO and shows how inflation fears grew in 2011 but have stabilised in 2012.

And inflationary pressure has abated in 2012. The consumer price index measure of inflation has fallen from 3.5% in April to 2.5% in August.

Why ‘swap rate’ money markets matter to savers and borrowers

When markets move a decent amount – and the move holds – it can affect the pricing of some mortgages and savings accounts. When swaps price a rate rise to come sooner, fixed rate savings bonds tend to marginally improve in the weeks that
follow. But it also puts pressure on lenders to withdraw the best fixed mortgages.

As for using swaps as a forecast, we’ve consistently warned on this round-up that they are extremely volatile and should be treated with caution – they should be used more as a guide of swinging sentiment rather than an actual prediction.

Rising rates: How mortgage rates on new deals have also risen

Rising rates: Fears about a fresh credit crunch in spring sent up swap rates, land mortgage fixed rates followed. But fresh efforts to get credit moving since May have had some beneficial effect.

Important note: Markets, economists and other experts haven’t had a great record of making the right calls in recent years:
2010 predictions 2008 predictions. This is Money has always advocated caution
with any sort of prediction (including our own!). There’s no guarantee that those who have made correct calls in the past will make them in the future.
[More: Whether to trust predictions].
We’d also urge consumers not to gamble with their personal finances when it comes to predicting swings.

Predictions from the ‘experts’

The MPC voted to ‘hold’ again in August, with the bank rate now at 0.50% year for nearly four-and-a-half years. A rise still looks a long way off, with the mainstream predictions for a rise to 0.75% ranging from 2014 to 2017. And many now believe a rate CUT is imminent.



Woman with a piggy bank

Some economists remain stubbornly attached to the notion that rates will soon return to normal. Andrew Sentance tried to persuade fellow members of the MPC to raise rates in 2011. They resisted. But even in April, nearly a year after he left the committee, he was predicting rapid rate rises. [Read the Telegraph column] He also predicted, wrongly, that the UK would avoid a double-dip recession.

The Centre for Economic Business Research, which has previously been marginally ahead of the curve in understanding low rates were with us for the long-term, said in January that interest rates would remain on hold until 2016. It repeated that in July.

Capital Economics (9 March), another one of the more useful forecasters, said the base rate would not move until 2015. It has stuck with this view and in early August, Vicky Redwood, chief UK economist at Capital Economics, said: ‘We have pencilled in an interest rate cut to 0.25 per cent for November.’ It repeated this prediction in September (see below) but edged away from that bold prediction in October: Will the bank rate be cut by Christmas?

So why such a long delay for rises? Economic prospects have steadily worsened in the past year – and a weak economy makes an increase in borrowing costs an unlikely option.

The prospect of low rates for years exists despite inflation remaining painfully high – it hit a peak of
5.2% (11 October) but is slowly easing lower (bar the odd blip), down to 2.5% in August.

Policymakers are adamant CPI will fall back further this year, and fall under the 2% target by 2013. In fact, it is now deflation that is emerging as a threat (4 July).

In early 2011 markets suggested a rate rise was imminent. But predictions for a rise to 0.75% have since taken huge strides into the future:

– In March 2011, a rise was seen as imminent;

- In
June 2011, markets pointed to the first rise in summer 2012;

- By early August, it was early 2013;

- October – early 2014;

- November – early 2015;

- Mid-December – late 2015;

- Mid-January – early 2016;

- Early February – late 2014;

- Mid-March – early 2014;

- Mid-April – early 2015;

- Mid-May – early 2015;
- Mid-June – early 2017;
- Mid-July – early 2017;
- Mid-August – early 2017;
- Mid-September – late 2016;
- Mid-October – late 2017

Our tweeting on rates:
@andrew_oxlade | @predict_rates

This is Money: View from the Editor

Regular readers of this page will know I’ve warned for several years that rates would remain low for a very long spell – and that readers should beware of false dawns on rising
rates; we’ve seen many (more on this below).

Andrew Oxlade

View from Money Editor Andrew Oxlade

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 the next few years even if inflation remains high (and as we’ve been forecasting here, it’s now falling fast).

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 is unlikely but worth watching out for.

For now, there’s no indication that pay demands are on the rise.
pay index – reliable data based on take-home wages paid into bank accounts – has been low for a year and fell sharply to 1.5% in September, from 2.3%. Official figures on pay (chart below) show rises remain at rock bottom, dropping to a rate of 1.5% in August (published by ONS – 12 September).

One other thing to watch is inflation expectations. If a fear of inflation becomes
embedded, workers will be more aggressive in demands for  bigger pay rises. But they’re not (see the BDO graph above) and for now, rate rises remain a very distant prospect.

The level of annual pay rises, which can give an early warning of inflationary pressure, remain at rock bottom | Source: ONS

The level of annual pay rises, which can give an early warning of inflationary pressure, remain at rock bottom | Source: ONS

Rate rise predictions: Money markets and economists

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 and displayed charts below to show how the market moves as economic prospects shift.

The clearest pattern emerges from the five-year swap chart, showing how markets had begun to believe in a rate rise in the spring of 2010 and 2011, but then show how that belief ebbed away in the second half of last year.

Money market trading

22 May (after
inflation figures

• 1.31% – one year

• 1.28% – two years

• 1.49% – five years

25 July (after dire GDP figures)
• 0.91% – one year

• 0.80% – two years

• 1.03% – five years

8 August
• 0.82% – one year

• 0.80% – two years

• 1.07% – five years

24 September
• 0.80% – one year

• 0.78% – two years

• 1.07% – five years

2 October
• 0.75% – one year

• 0.71% – two years

• 1.00% – five years

11 October
• 0.69% – one year

• 0.67% – two years

• 0.97% – five years

One-year swap rates (which influence one-year fixed-rate bonds)

Since January 2011

Five-year swaps (influences 5-yr savings bonds and fixed mortgages)

Since January 2010

Views from economists

Howard Archer

Howard Archer of IHS Global Insight (19 September) said: ‘We strongly suspect that the Bank of England will deliver a further £50 billion of QE in the fourth quarter, taking the stock up to £425 billion. November seems a prime candidate for this, given that July’s £50 billion QE extension (to £375 billion) runs through to then and the MPC wants time to see what impact the “Funding for Lending “ scheme has.
However, we remain sceptical that the Bank of England will take interest rates down to 0.25% given ongoing serious doubts within the MPC that such a move would have a net overall beneficial impact.’

Martin Beck of Capital Economics (19 September) said: ‘With growth expected to be “subdued and uncertain”, some members felt that additional stimulus “was more likely than not to be needed in due course”. As a result, we still expect another £50bn of asset purchases to be announced at November’s meeting and for QE to ultimately reach £500bn. We also think there continues to be a decent chance of an interest rate cut in November.’

The Bank of England with chart line running though it

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,
deflation rather than inflation has remained the greater long-term threat. Treat claims of
rapidly rising rates with caution!


How rate rise hopes dried up in 2010

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 MPC member Adam Posen) fear that measures aimed at reviving the economy – rate cuts and masses
of quantitative easing – have unleashed forces that will create rampant
price rises and that rate rises will be needed to prevent hyperinflation
taking hold. They also fear rising demand from emerging market economies
will also push up prices. With inflation worryingly high in 2011, these
views gained traction.

Warren Buffett
Warren Buffett was among the first to warn on inflation

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).

controversial economist warned inflation would force the MPC into a series of
rate rises, taking the
bank rate to 8% by this year, 2012.

Weak sterling in 2010 and 2011 also added inflationary pressure: falls
in the pound make it more expensive for Britons to buy foreign goods, effectively
importing inflation. [
what next for the pound?] And we’re also
importing inflation from booming China.

Others point out that rapid rate rises are rarely expected. Insurance
service RateGuard points out periods of quick-fire increases in the chart

RateGuard warns of how interest rates, over the past 50 years, have sometimes risen rapidly.

RateGuard warns of how interest rates, over the past 50 years, have sometimes risen rapidly.

Viewpoint 2: Why rates won’t rise

Andrew Oxlade

Opinion (archive):
Inflation is a concern, but there’s good reasons why rates will remain low

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.

April 2010, leading economist Roger Bootle actually argued for a CUT in rates to 0% (more below). The bold view raised eyebrows – as happened
when we suggested in 2008 that zero rates were possible – but his prediction may yet come true.
The Bank’s MPC has talked about a rate cut to 0.25% in 2012.

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.This has happened in Greece, where mortgage rates have risen, pushed higher by rising yields on government bonds.

…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 U.S. and UK rates running too high through the
Noughties. More recently, it suggested the UK bank rate should be raised
rapidly. But critics argue it doesn’t take all factors into account, such
as the sterling slump of 2009 and 2010.
This commentary from a Lloyds economist is worth a read.
Chris Dillow on explained in 2010 why the Taylor Rule’s suggested 4% bank rate shouldn’t
apply. The suggested rate in May 2012 was 3.5%, according to Citibank
[read on the FT]


Twenty years of base rate changes


The economist who devised a new way to forecast inflation is worried about 2012

- What next for inflation? The experts who fear a price spiral

- Why mortgage tracker rates are rising already

- Countries with rates already rising

Respected NIESR predicts 1.25% by end of 2011

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% – MPC man

Rates at 8%? History tells us it could happen

CBI: 2.75% rate in 2 yrs

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 rate rise

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

QA: What is quantitative easing and will it work?

‘Why doesn’t the Bank print money and give it to me?’

Central bank rates in the run-up to the crisis

low rates graphic

This round-up was created in 2007 and has been downloaded more than 13 million times

The comments below have not been moderated.

Phew, thats another £115 a month to spend down the pub. Only trying to do my bit to support the local economy:-)

Seriousely though, great news – down from 5 years at 5.99% to 1.2% on a £420,000 mortgage! for a few ( 17 years left @ .95 above BBE) years. Thats £1,680 a month saving. I promise to spend wisely….Hic Hic BUUURRRPPP


11/10/2012 15:21

If we think this is bad, wait until Ed Balls gets his sticky little mitts on the keys to No.11. What we’re experiencing now will feel like a boom, compared to his bust – guarateed!


11/10/2012 14:12

“The vast number of totally demoralised savers who used to spend from the position of strength they had build up are not shopping.”
– Cloud 9 , Persepolis, Bonaire, Sint Eustatius and Saba, 05/10/2012 16:16
On a micro level I might be indicative of this fact – last night the washing machine started ‘playing up’, the old days I would probably have just bought a new one (it’s 3yrs old) and given the ‘playing up one’ to a neighbor who may or may not fix it would anyway be happy with a slightly unreliable 3yr old machine as against their current very unreliable 10yr old machine – but instead with my guidance my wife fixed it – it’s not that we can’t afford a new one, it’s more a feeling that I don’t want to spend money, it’ll just take to long for savings to return to the ‘pre purchase’ level.


Esh Winning, United Kingdom,
11/10/2012 13:30

The low base rate is the cause of the continued recession. The vast number of totally demoralised savers who used to spend from the position of strength they had build up are not shopping. Hoping that people will get into debt to get us out of the hole is absurd. Smart (ish) debt is now in buy to let mortgages where extortionate rents are recycled into higher house prices for the haves with no benefit for the wider economy. Their hapless tenants have even less left over to spend than they had a couple of years ago. Sorry BoE you are the weakest link g’bye.

Cloud 9

Persepolis, Bonaire, Sint Eustatius and Saba,
05/10/2012 16:16

- Dave , London, United Kingdom, 04/10/2012 17:14Gordon Brown stated that he abolished boom and bust, well he has abolished boom


Clacton, United Kingdom,
05/10/2012 10:50

Richo…..You keep getting told the damage to pension was the pension holidays.Dave , London, United Kingdom, 04/10/2012 18:08Who told you that? Gordon Brown?


Clacton, United Kingdom,
05/10/2012 10:48

Awesome news for home owners, a sickening blow to renters, oh dear the renting gamble hasn’t paid off!

– Quentin , Cheshire, 04/10/2012 15:01###############It has for me. Constant price falls and constant saving have now put me in a position were i probably wont need a mortgage to buy my first home. I am the proud owner of zero negative equity.

frankie mcgill

04/10/2012 21:36

Richo…..You keep getting told the damage to pension was the pension holidays firms were told to have. Royal Mail £10B still in debt, Sainsbury £1.5B, add in BA, BT, Tesco, MS and all the other companies in the FTSE 350. What did Mrs T do with the $500B oil and gas money….Just look at Major PFI’s how many were bailed out last year at a cost of £1.5….How about the £1B plus lost in one day on the ERM gamble.


London, United Kingdom,
04/10/2012 18:08

Brown had 13 years of growth before the bust, Osborne is trying for 13 years of bust before the boom!!!!


London, United Kingdom,
04/10/2012 17:14

Awesome news for home owners, a sickening blow to renters, oh dear the renting gamble hasn’t paid off!


04/10/2012 15:01

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