When will interest rates rise?

Following last week’s Monetary Policy Committee’s decision to keep interest rates on hold, we ask experts what they think will happen to rates in the future.

When will interest rates rise?

Tom Stevenson, investment director for personal investing at Fidelity International:

“It seems the bank is reluctant to rock the economic recovery by hiking rates just yet and the Bank’s view on growth has also been downgraded since the May meeting. Three months ago, the Bank expected GDP to rise by 1.9% in 2017, 1.7% in 2018 and 1.8% in 2019. This time, the equivalent forecasts are 1.7%, 1.6% and 1.8%.

“What’s driving that sluggish growth is the other key figure in last week’s smorgasbord of data – inflation. While growth is running a bit cooler than expected, inflation is a bit hotter in the near term and safely above the Bank’s 2% target. And that is squeezing consumers’ spending power because household earnings are not keeping pace with prices. Again, the Bank has tweaked its expectations on inflation. Three months ago, it was looking for prices to rise by 2.6% this year, by 2.6% in 2018 and 2.2% in 2019. Today’s forecasts are respectively 2.7%, 2.6% and 2.2%.

“So what do last week’s announcements mean for investors? More of the same really. It is hard to see interest rates rising very far, very fast in the current sluggish environment. And with no pressure from other central banks – the US, Europe and Japan are also loath to tighten prematurely – we should expect the Bank to remain on its lower-for-longer trajectory.

“I would be surprised to see any hike at all this year. Even when last year’s quarter point cut to 0.25% is reversed, I would caution against assuming that the Bank is setting off on a more determined tightening path.

“At the risk of sounding like a cracked record, anyone with savings still sitting in cash will continue to struggle to generate a real return.  If anyone is still unsure about the benefits of investing in stocks and shares over saving in cash then our calculations (as at 30 June 2017) show that if you had invested £15,000 into the FTSE All Share index over the past ten years you would now be left with £25,270. If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £15,691*. That’s a difference of £9,579 – too big for any sensible saver to ignore.”

Laith Khalaf, senior analyst at Hargreaves Lansdown:

“The UK economy is faltering and consumer purses are under pressure, so it’s no surprise the Bank of England has decided not to upset the applecart by raising interest rates. June also saw a surprise drop in inflation, relieving pressure on the central bank to tighten policy.

“However, consumer borrowing still looks to be building up, and has now breached the £200bn mark for the first time since 2008. Meanwhile the FCA is warning that 2.2 million borrowers are in financial distress, despite ultra-low interest rates, which means the Bank of England is going to have to remove the sticking plaster of loose monetary policy very slowly indeed.

“Unfortunately that spells many more years of poor returns for cash savers. The Office for Budget Responsibility thinks interest rates will rise to just 1% by 2022, still below the rate of inflation, assuming the Bank of England meets its 2% CPI target.

“Cash savers who have been clinging on in the hope of higher rates will probably find they have to travel further than expected to get to the pot of gold at the end of the rainbow. Even when they get there, they may find only a few coppers to rub together after inflation has taken its toll.”

Alan Wilson, senior investment manager of active fixed income at State Street Global Advisors:

“The BoE continues to walk the policy tightrope, balancing transitory inflation pressure against concerns Brexit uncertainty will eventually curtail domestic growth.

“It is clear hawkish discontent has been somewhat tempered – weaker than expected growth, wage and consumer data since June’s meeting has given likeminded committee hawks food for thought.  While speculation had grown that there could be further dissenting voters at August’s meeting – with BoE Chief Economist, Andrew Haldane and Governor, Mark Carney the obvious candidates – the hawks in waiting failed to bare their talons.

“Looking forward, the MPC will maintain its hawkish bias to encourage the market to dampen inflation expectations on its behalf.  It is very unlikely this signalling will culminate in formal policy action, particularly in the early stages of the Brexit process.  Learning lessons from the European Central Bank (ECB), the MPC will continue to tread lightly and resist the temptation of tightening amid transitory inflation pressure.”

Ian Kernohan, economist at Royal London Asset Management:

“As expected, the Bank of England kept interest rates on hold, although there was some market nervousness about how many members would decide to vote in favour of a hike.  Given the recent run of economic data, the Bank have had to downgrade GDP growth and wage growth forecasts.

“The MPC have kept the window open for an earlier than expected interest rate hike. However we still think interest rates will remain on hold until there are clearer signs of a pick-up in wage growth and we get some visibility on the likely impact of Brexit on the economy.”

 

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