Are you interested in interest rates?

Whether you’re a borrower or saver you’ll no doubt watch interest rate changes keenly. You may not be sitting on the edge of the sofa waiting for news from meetings of the Monetary Policy Committee, but its machinations have a genuine bearing on our financial well-being. After all, they’re the ones who decide the direction of the base rate.

When will interest rates rise?

It’s been rooted at 0.5% for the last six years but the interest rate seems destined to remain there in the short term at least. If you’re a saver this is probably not what you wanted to hear, as your savings may not have been producing much return for a while now. It was back in 2009 when the financial crisis first struck that the rate was finally reduced to 0.5% after a long descent, and since then UK savers have seen little to lift their spirits.

Just a few months ago, mortgage holders were preparing themselves for a rise in borrowing rates from the start of 2016. More recently expectations have slowed and many forecasters are now suggesting that they’ll remain exactly where they are well into 2017 at least. Some commentators have been predicting the end of this record low-rate run almost since it began, but as time goes on the predicted date for a rise is pushed back ever further.

Why the change in interest rate predictions?

Quite simply because the economy refuses to stick to the model. Many expect the UK economy to mirror that of the US but even there, there are long delays in the expected rate rises. The stock market crash in August also further served to undermine confidence in the performance of the domestic economy.

That pessimism has been compounded by worse than expected UK growth, with GDP increasing by just 0.5% in the third quarter of 2015, and an unexpected return to deflation in September. The Bank of England’s quarterly inflation report also served to dampen hawkish impulses.

Is anyone dismissing the trend?

There are others who suggest that a minor rise could occur during the first quarter of 2016. This stems from their belief that as earnings begin to grow again, and the economy pulls away from the difficult third quarter of 2015, there will be a growing clamour for at least a token rise. However the impact of wage increases still fails to be reflected in the inflation rate, which remains firmly rooted around zero, so even if it were to happen such a rise would not signal the commencement of a period of rising rates.

Even if rates were to rise in the coming twelve months this would most likely take the form of one or possibly two small rate rises with the longer-term base rate growing to 1.5 points by the end of 2017 as a maximum. The lack of any appetite for a sustained rise is an admission that risks to the UK economy are still great, with well-documented global concerns surrounding the Chinese economy among others. There are also continuing signs that UK growth may not strengthen as much as expected either, with wage growth and exports remaining sluggish.

How accurate are these predictions?

Those forecasting interest rate changes over the last few years have not met with resounding success. Back in the summer of 2014, most commentators believed we would see the first rate rise during January 2015 yet now, twelve months later, we’re still waiting. Indeed predictions of rises have been a constant for most of the last six years and yet the rate remains stubbornly where it is. The Monetary Policy Committee still unmoved.

This is born from an economic reality of high state and personal debts, and an end to the long period of growth that was driven by the spending of the baby boomer generation. They are now retiring and drawing their pensions, and this coupled with the external pressures of a volatile world economy may signal that rates will remain at low levels for the foreseeable future. So it seems it’s a case of as you were.

For more information on your own future financial planning call Expert Wealth Management on 01993 772467 for an initial consultation or contact us online.