The current rate of interest looks pretty static at present and a rise in the next three to six months looks unlikely. Mark Tubb, Business Mentor & Co-Director of Bucks Conferences explains more about the current issues surrounding Interest Rates and why he feels a rise towards the back end of 2016 is possible if the points below ease and no new detrimental events occur.
What’s the Logic behind current low Interest Rates?
The current bank rate has been with us at 0.5% for more than six years, we keep expecting it to rise; the potential to increase fluctuates and is currently reduced.
“What is the logic behind current interest rates and when might interest rates rise?”
Predictions Past and Present.
2015 predictions were for a likely rate rise in 2015. It didn’t happen. The first rise in US interest rates occurred in December 2015. The UK rates should be influenced by US rate rises to a degree and the expectation was that we would probably see upward UK rate pressure early in 2016. Now here we sit at the beginning of 2016 and currently global money markets seem to imply that the first UK rate increase will come in 2019.
Why won’t the Bank of England increase interest rates at present?
There have been several global events that make the Bank of England look to delay a UK interest rate rise yet again:
How quickly will the Bank of England increase rates after they start to rise?
After any initial rate increase, the market is pricing in only very slow rate increases. An increase to 3% is currently not expected until after 2020. The impact of small rate increases on the cost of debt taken out at current very low interest rates is huge. This means that a great deal of care has to be taken when increasing interest rates.
Why is it so difficult to forecast rate rises currently?
Interest rates have been a lot higher on average in the past and the tendency is to expect them to return to higher levels to keep inflation at target levels. However large state and private individual debts combined with an aging baby boomer population puts a deflationary shadow over our economy and could mean many more years of low rates. The chaotic global situation could also contribute further deflationary pressure.
The credit margins that banks load onto the Bank of England Base rate are historically high due to perceived higher risk and a need to strengthen the banks profit and capital strength. The cost of fixed-rate mortgages however remains historically low compared with “trackers” on longer-term loans. The price of fixed-rate mortgages could fall further. This is because “swap rates”, the rates at which lenders “buy” money for fixed periods on money markets have plummeted in the first three weeks of 2016. This is because of a gloomier outlook for the world economy and the UK economy; meaning rate rises are less likely than a month ago.
Nobody can say for sure what will happen to interest rates and everyone has to form their own view. The logic I set out above could well be wrong, it is only an opinion, so research carefully and think through using your own logic before you take any meaningful decisions.
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