Wednesday, 17 August 2011

Interest rates - what to expect

How are our finances going to be affected by the huge shift in interest rate expectations?

The prospect of a rise in interest rates has receded into the far distance.

Back in March, those all-seeing City economists were predicting, confidently, that the Bank of England's base rate was set to rise, with the first hike pencilled in for May.

Some even thought that the Bank's Monetary Policy committee would eschew quarter-point hikes and plump for a half-point jump to 1%.

Three of the MPC's nine members had already voted for an increase in February, they were so worried about inflation.

Come April and the predicted date for a rise was pushed back to August, then to November.

And today we hear that the MPC voted 9-0 against a rise.

More economists are suggesting that interest rates will stay where they are until 2013. That is so far ahead that it is hard to say what the situation will look like by then.

It is an intensely gloomy situation for people who rely on savings interest to prop up their incomes. Although headline savings rates are around 3% and fixed rates are higher, the average being earned from a Cash ISA is just 0.5%, uncannily close to Bank base rate.

Don't expect that to change much.

The conventional wisdom is that low rates are great news for mortgage borrowers. The large proportion of households on variable mortgage rates can breathe a sigh of relief that their payments won't be going up soon.

On the other hand, homebuyers face a tricky judgement. Should they choose a cheap variable (or tracker) rate, on the grounds that a rate rise could be a long way off?

Or should they choose the security of a fixed rate, knowing that for a period of 5 years, say, their payments will not change? Given the outlook for rates in general, new fixed rates could be forced down.

There is no easy answer. As you have seen, forecasts of future interest rates can shift wildly from month to month.

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