What is going to happen to interest rates?

interest ratesA major rate rise is looming, perhaps as soon as next month, says one expert. Another says that interest rates will move upward quickly. A third suggests they will move steadily.

The fact that all three experts sit on the Bank of England Monetary Committee responsible for setting the bank lending rate suggests that the future for UK interest rates is uncertain, to say the least.

Predicting a rate hike soon

The rapid rise is forecast by Gertjan Vlieghe, who put forward the arguments for a rise in rates in the coming months in a speech to economists in London last week.

His views echo those of Bank of England deputy Ben Broadbent, who suggests the UK will see future rate rises higher than market expectations, as inflation continues.

Bank of England Governor Mark Carney, on the other hand, after first denying plans for rises has now said that any increases in UK interest rates in the coming months will be “gradual” and “limited”.

But dramatic or gradual, and imminent or simply on the horizon, it looks as though the ten years of record low interest rates is finally coming to an end. The Bank’s Monetary Policy Committee met last week, and the rate remained at 0.25%, but they gave a strong hint that the UK’s first rate rise in a decade was nearing, despite the uncertainty surrounding Brexit.

The pressures for a hike

The call for an interest rate rise is a reaction to growing inflation which hit 2.9% in August as the effects of the slump in sterling following the Brexit vote continued. Pushed by increased prices for imports – which include food, raw materials and oil and gas – the cost of living seems to be spiralling upwards. The Bank of England is tasked with keeping inflation under control. The ongoing weakness of the pound makes a rate hike almost unavoidable.

In a speech to the International Monetary Fund in Washington DC on Monday.

Mark Carney has said that “some withdrawal of monetary stimulus is likely to be appropriate over the coming months” to help return inflation to its 2% target.

The news has come as something of a surprise for most economists, who until last week had expected the Bank to delay any rate increase until next year, or even 2019. Surprise or not, it was enough to give the pound a boost on foreign exchange markets, suggesting a rate rise will actually be good news for sterling.

It is part of global phenomenon. The US Federal Reserve has already started to raise borrowing costs, and with the Euro apparently now in good health the European Central Bank is expected to start reducing stimulus for the eurozone.

The Brexit problem

In the UK, though, the problem is as usual, Brexit. Mr Carney warned that there remain “considerable risks” to the outlook for the UK economy. Although the fall in Sterling gave a boost to manufacturing industry and a record high for the FTSE, Mr Carney now believes the consequences of the slide are resulting in higher prices and a squeeze on household incomes.

This has prompted consumers to cut back on spending, slowing the economy, while businesses have also cut back on investment. Together these pressures have caused economic growth to slow in the first half of the year. Mr Carney believes that an increase in rate can achieve the inflation target, helping the broader economy recover.

What will the impact of a rate rise be?

Whether or not the rate rise encourages investment in the UK, the effect on families will be felt first. We have lived in a low-interest world for so long, many people with mortgages have never experienced a rate hike.

Those who have will be fully aware that it will mean an increase in the cost of buying a home. At rate rise will mean higher monthly repayments for millions of people with variable rate and base rate tracker mortgages. Anyone who has taken advantage of low rates to fix their mortgage will be able to take advantage of the record lows for as long as their fixed period remains.

Whether this increase in cost has any impact on the cost of houses remains to be seen, although some observers suggest that prices may have already started to fall in some regions.

Savers, on the other hand, will have some better news to look forward to. Savings accounts may put their rates up, although it seems likely that most will continue to offer low rates for as long as possible.

What should you do?

If you are concerned about the effects of a possible interest rate hike, you might want to act now. It may be possible to switch to a fixed rate mortgage if you have not already done so.

You may also want to look at how you are using your savings and if an increase in rates might make them look more rewarding. To discuss your best course of action, please call the Continuum team.

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