9-Feb-2012 - Interest rates: News and predictions

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Interest rates predictions: When will the UK bank rate rise again? By Andrew Oxlade T: @andrew_oxlade Last updated at 3:47 PM on 8th February 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). This is Money Editor Andrew Oxlade explains all. Regular readers of this page will know we'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 (see below). 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 2012 and 2013, even if inflation remains high (and it probably won't). 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. Vocalink's pay study - reliable data based on take home wages paid into bank accounts - has been steady for three months at around 2.6%. Historically, pay rises start with manufacturers and spread out to the wider economy but Vocalink's index showed a fall for the sector in December, from 4.1% down to 3.6%. One other thing to watch is inflation expectations. A BoE index for August showed them on the rise (15 September) but it fell in the latest index publication, in December. If expectations become embedded, workers will start to demand bigger pay rises.For now, rate rises remain a dim and distant prospect. Today's best rates: Isas | Fixed-rate bonds 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. 4 January• 1.37% - one year • 1.35% - two years • 1.60% - five years 13 January• 1.29% - one year • 1.22% - two years • 1.49% - five years 26 January• 1.29% - one year • 1.22% - two years • 1.55% - five years 1 February• 1.28% - one year • 1.21% - two years • 1.48% - five years 6 February• 1.29% - one year • 1.25% - two years • 1.61% - 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 View from an economist Howard Archer of IHS Global Insight (26 January): 'There seems to be little appetite within the MPC for taking interest rates lower than 0.50%. It is notable that the minutes of the December meeting once again did not reveal any discussion within the committee over the possibility of trimming interest rates and it is also significant that even at the height of the 2008/9 recession, the Bank of England take interest rates below 0.50%. This reflected doubts within the MPC that even lower interest rates would have a net beneficial impact.'It is very clear that interest rates will not rise for some considerable time to come – we do not expect any hike until at least the second half of 2013 and it currently looks eminently possible that the Bank of England football jerseys could keep interest rates down at 0.50% through to 2014.' 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! More: How rate rise hopes dried up last year 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 riseThe '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 worringly high in 2011, these views gained traction. One popular theory is that Western governments custom nhl jerseys 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). One controversial economist has warned inflation would hold and that the MPC will be forced into a series of rate rises, taking the bank rate to 8% by 2012. That's now looking very unlikely. Weak sterling has also added inflationary pressure: falls in the pound make it more expensive for Brits to buy foreign goods, effectively importing inflation. [what next for the pound?] And there's always the danger that we could import inflation from booming China. Viewpoint 2: Why rates won't rise 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. In April 2010, leading economist Roger Bootle actually argued for a CUT in rates to 0% (more below).He bold view raised eyebrows - as happened when we suggested zero rates in 2008 - but his prediction may yet come true. 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. ...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 US 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 investorschronicle.co.uk explained in 2010 why the Taylor Rule's suggested 4% bank rate shouldn't apply. TAYLOR RULE ON INTEREST RATES - Q2 2010 Bank rateSuggested rateSource: Lloyds TSB Financial Markets UK0.5% 4.2%US0-0.25% -1.3%Euro 1%-2.1% Inflation and rates Official data has shown inflation beating expectations more often than not in the the past two years (Figures marked with a star are when inflation was higher than forecast, with the forecast in brackets): CPI inflation history (and expectations) • September 2010 3.1% (3.1%) • October 3.2% (3.1%)* • November 3.3% (3.2%)* • December 3.7% (3.4%)* • January 2011 4.0% (4.0%) • February 4.4% (4.2%)*• March 4.0% • April 4.5% (4.2)*• May 4.5% (4.5%)• June 4.2% (4.4%)• July 4.4% (4.3%)*• August 4.5% (4.6%)• September 5.2% (5.1%)*• October 5.0% (5.1%)• November 4.8% (4.8%) See a longer history of inflation READ MORE:- 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 - Q&A: What is quantitative easing and will it work? - 'Why doesn't the Bank print money and give it to me?'   - UK base rate: A full history since 1694 • This round-up was created in 2007 and has been downloaded more than 10 million times

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