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Should we be expecting interest rates to rise

Budget 2015

The majority of economists expect the next movement in Bank Rate is more likely to be up rather than down, barring any major economic shock. The current consensus view is leaning towards 2018 at the earliest but it is still very possible that rates will rise before the year is out and some bookmakers are offering pretty short odds of 5/1 that we will see an increase in Bank Rate in 2017. 

The Bank of England’s Monetary Policy Committee, which sets Bank Rate each month, has indicated that it is keen to keep rates at current levels for the foreseeable future to support growth through the initial phase of the Brexit negotiations. Notwithstanding this strategy, there are grounds to suggest 2017 could mark the end of the current low interest rate era. 

Firstly, the weak pound has increased the cost of our imports thus driving up consumer price inflation from 0.3% in November 2015 to 1.2% in November 2016. Government policy is to keep inflation to a 2% target, above which its usual response is to raise Bank Rate. The latest report from the Treasury’s forecast panel projects inflation will rise to 2.8% this year. 

Moreover, the US Federal Funds Rate (the equivalent of UK Bank Rate) was raised in December from 0.375% to 0.625% and the Federal Reserve (equivalent of the Bank of England) announced that it anticipated a further three rate hikes in 2017. UK rates do not automatically follow US rates, but the dollar is likely to appreciate further against sterling as a result which will further exacerbate UK inflation. 

In December, HSBC withdrew its cheapest ever fixed rate mortgage deal – two years at 0.99% - and increased rates on other products except its variable rate mortgages. Other high street lenders may follow suit, especially as swap rates (a guideline indicator for the direction of fixed rate mortgages) have been trending upwards since October and lender margins are at or near rock bottom. 

However, even if Bank Rate is increased this year, the initial impact may be limited. Over 80% of mortgages issued in the first three quarters of 2016 were on a fixed rate basis of at least two years (over 87% of which on a repayment basis), while 52% of outstanding balances  at Q3 were similarly on fixed rates (73% on a repayment basis). 

There is also a degree of comfort in the recent history of Bank Rate hikes which provides evidence that rate increases are typically gradual: since January 2000, there have been 12 rises in Bank Rate – all of them by 25 basis points. Nonetheless, a steady drip of several small increases over a relatively short period of time could build into a significant cumulative effect. 

With so many other factors at play, not least any possible Brexit fallout and the “Trump effect”, it is impossible to say with any degree of certainty which way rates will move. Nevertheless, the window of opportunity to secure a good low fixed rate mortgage deal will clearly not last forever and buyers and owners looking to re-mortgage would be well advised to monitor events closely over the coming year.

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Nick has more than 20 years’ experience within the property research arena.

Nick Barnes

Nick Barnes

St Magnus House

020 3040 8406