Latest Bank Rate predictions: 3pc within three years, then 5pc
20 December 2016 • 12:54pm
D onald Trump’s victory in the US presidential election has upended the world’s financial markets – with possible consequences for savers and borrowers everywhere, including Britain.
At the start of the year, the expectation had been for Bank Rate, Britain’s official cost of borrowing, to rise in December 2016 or January 2017. But the EU referendum caused the Bank of England to cut Bank Rate to 0.25pc amid fears of an economic shock and expectations for the first rise were set back significantly.
However, Mr Trump’s victory has changed the economic mood, not only in America but around the world. Suddenly growth, inflation, interest rates and investment returns are expected to rise in the US, with the effects rippling out to other countries.
Here we look at the possible consequences for Britain’s Bank Rate and the interest rates that are actually offered to savers and borrowers in the UK.
The latest Bank Rate predictions – and can we trust them?
Poor economic forecasting, especially about interest rates, has been a feature of the post-financial crisis years. There have been frequent predictions of imminent rate rises that have simply not occurred as economists failed to grasp the extent of the headwinds that Western economies faced.
It may therefore be tempting to ignore experts who now confidently predict that Mr Trump will cause rates to rise. While Telegraph Money shares that scepticism, there are some economists whose views are, we think, worth listening to.
R oger Bootle, the Telegraph columnist who founded the Capital Economics consultancy, was one of the few economists to correctly predict that interest rates would remain at rock-bottom levels for many years after the financial crisis.
For example, in this article from June 2009 he said Bank Rate could be kept at record lows for as long as five years. While even he underestimated the extreme longevity of low rates, markets were at the time predicting rates of 2.5pc by the end of 2010. In other words, he was broadly right while the markets were hopelessly wrong.
So what does Mr Bootle expect now?
His forecast for 2017 is that there will be no change to Bank Rate, but that it could reach 3pc by the end of 2019.
He said: “It’s quite possible that in three years’ time Bank Rate might be 3pc, and one has to imagine that it is going back up to something like 5pc, but that might take a long time to get to.”
The most important factor in determining the timing of interest rate rises was “the overall strength of the economy”, he added.
Mr Bootle also outlined some possible threats to any future rate rises.
First, even if there is strong economic growth the Bank of England may leave rates alone because of concerns surrounding Brexit. If the economy is weak on top of Brexit anxiety, rates could even be cut, he said.
Mr Bootle also addressed the likely influence of Mr Trump’s election on interest rates in Britain. “If Trump’s policies are to lead to stronger growth in the US in the short term – and I think they will – the connection [with the British economy] won’t be powerful but it will tend to stoke growth in the UK, and British exports to America will be stronger.
“All of that points in the direction of higher interest rates here.”
The Bank of England’s American counterpart, the Federal Reserve, recently raised US rates and Mr Bootle said that, while higher rates in the US didn’t automatically mean higher rates here too, “in the past they have tended” to follow suit.
What does this mean for mortgages and savings?
Bank Rate is one thing, the rates we pay on mortgages and receive on savings are another.
As the graph shows, mortgage rates fell significantly in the years after Bank Rate was cut to 0.5pc in 2009, even though the official cost of borrowing didn’t change again until this year. Savers saw a similar decline in the rates they were offered.
N ow there are tentative signs of improvement in savings rates, although again Bank Rate has not changed since the Brexit-induced cut to 0.25pc. Some of the best mortgage rates, such as HSBC’s 0.99pc two-year fix. have also been withdrawn.
These movements suggest that events in America – expectations of a “Trump boom” and the rise in interest rates – have already caused actual interest rates to rise in Britain.
Wholesale “swap” rates – the rate at which mortgage lenders secure capital for fixed-rate loans – tend to fluctuate irrespective of Bank Rate. They have been rising since August, a sign that fixed mortgage rates could soon increase.
Exceptionally low fixed rates are still available, but if the market is beginning to turn it may be wise to secure a cheap fixed-rate mortgage while you can.
Holding on to a tracker mortgage could become expensive if Bank Rate rises, and delaying a switch to a fixed rate could mean you en d up paying more when you do.
Savers, meanwhile, may be best advised to avoid locking their money away in long-term fixed-rate deals so that they are able to take advantage if rates to continue to improve in the coming months.
This is the opposite of the advice we gave when rates were falling, when it was best to grab fixed rates quickly before the deals were withdrawn and replaced by less attractive offers.
Mr Bootle said savings rates could be more responsive than mortgage rates if Bank Rate did change, as the intense competition between mortgage lenders could lead them to cut their margins rather than raise rates.
He said: “For small Bank Rate movements there’s no necessary connection to mortgage rates, because of competitive pressures. But once you start to talk about big swings in interest rates, there’s no scope for them to be absorbed into lenders’ margins.”
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