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Will interest rates rise in 2015?

Posted on 09 Jan 2015 by Chris Torney

Last summer it seemed that a rise in UK interest rates was imminent. Unemployment was falling, the economy was growing and inflation was close to its 2% target.

In June, the Bank of England governor Mark Carney said that a rise in the base rate could happen sooner than expected, leading many analysts to believe rates would be lifted from their 0.5% low by the end of 2014.

The minutes from the Monetary Policy Committee’s monthly meeting in August showed two members had voted for an increase – the first split decision since 2011.

Bank of England

But much has changed since then, and at the moment the prospect of higher rates seems as far away as it has ever been. Yesterday, for the 70th month in succession, the MPC voted to leave the base rate unchanged.

It is the collapse in the oil price that has thrown a spanner into the works. For consumers in the UK, petrol and energy costs are down and inflation has fallen sharply as a result. Cheaper raw materials and production costs are also feeding through into lower prices.

A rise in interest rates right now would be likely to depress inflation – the eurozone went into deflation this week – and it’s not clear that Britain’s economic recovery is yet robust enough to withstand higher rates.

So what does this mean for the rest of the year?

Well, while oil prices remain low it is very difficult to envisage rates rising. The Bank of England has in the past said that any rate rise would be largely in reaction to falling unemployment and increasing average wages. While both are moving in the right direction at the moment, they will struggle to eclipse the impact of cheaper oil.

The oil market could of course change quickly, and there is the potential impact of May’s General Election to take into account. But many experts now think there will be no rise from 0.5% until the start of 2016 at the earliest.

Ongoing low rates have been great news for borrowers of all stripes: long-term fixed-rate mortgages are currently as cheap as they have ever been, and credit-card lenders are battling for new customers with longer and longer interest-free deals.

But for anyone with cash to spare, the outlook remains largely bleak. Returns from savings accounts are generally woeful, even for those willing to tie their money up for a number of years.

And even if the Bank did decide to raise rates, they are unlikely to go far: Mark Carney has spent much of his 18 months so far as governor managing expectations and stressing that any future rises would be very gradual.

There has been a lot of talk about whether or not low interest rates are now a permanent feature in the UK. Well, rates have been at rock bottom for almost six years now: in economic terms, that feels pretty permanent.

For the thousands of savers who have had their nest eggs stuck in accounts paying 0.1% a year for all that time, the losses must be eye-watering. If only there was a way for their money to generate healthy returns with low risk…

Category: Industry news
Tags: economy

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