Jan 2016 Interest rates prediction forecast


When will interest rates rise?

Two-minute briefing: Predictions have suddenly shifted. We explain why - and what it means for mortgages.

A view shows the Bank of England behind blossoming flowers in London
Decision-makers: The Bank suggests rates are unlikely to rise in 2014 Photo: Reuters

Bank Rate, at 0.5pc for nearly six years, was held again today. And 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.

 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 the summer - is yet to be fully registered in economies and inflation data.

Furthermore, some experts suggest a currency war in Asia - policy in Japan is determinedly devaluing its currency - that will result in deflation being exported on a grand scale around the world (Britons will find prices tumbling on Asian imports).

What's the latest predictions?

The Bank Rate, at 0.5pc since March 2009, is expected to stay there until February or March 2016. 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 shows how the slump in the oil price has forced a shift in the past week (based on the prediction indicated by the "overnight index swap" on money markets):

IHS Global Insight expects a rise from 0.50pc to 0.75pc around August and then no further rises in 2015, but its chief European economist, Howard Archer, added: "It is entirely possible that the Bank of England will hold fire on interest rates until the fourth quarter of 2015 or even until early 2016.

He expects 1.75pc by the end of 2016 and 2.75pc by the end of 2017.

Capital Economics has been one of the more accurate forecasters, suggesting 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). Samuel Tombs, senior UK economist, said: "By the third quarter, we think that it will have become clear that inflation will pick up before long and that the economy warrants modest interest rate rises."

But with a tax squeeze in 2016 and only modest rises in wages, he says the Bank will only "raise rates gradually". "Indeed, by the end of 2016, we think that Bank Rate will have risen to only 1.25pc," he added.


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. 

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.

Market predictions for Bank Rate from the BoE Inflation Report in November

Q4 2015 Q4 2016 Q4 2017 
1.2%  1.9%  2.6% 
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