The speed, or lack of it, with which interest rates are predicted to rise reflects continuing uncertainty in the UK
We all know interest rates will rise eventually. The question is, when? With base rates in their tenth month at a record low of 0.25 per cent, and annual CPI inflation having risen to 2.7 per cent in April – well above the Government’s 2 per cent target – we may expect the rise to come sooner rather than later.
What is more, many of the shocks threatening the economy have been avoided. Investors have welcomed the victory of pro-EU economic reformer Emmanuel Macron in the French presidential election and, despite a slowdown in growth in Q1, the UK economy has proved more resilient than expected since the Brexit result.
Nevertheless, at its meeting last month, the Bank of England’s Monetary Policy Committee voted to maintain rates at 0.25 per cent.
Based on financial markets data and the economic outlook, we expect these record-low rates to persist for at least another year, with just a modest rise to 0.5 per cent within two years. In three years’ time they may have crept up, but only to 0.75 per cent.
Three-month Libor, meanwhile, will move before then, rising to 0.5 per cent by mid-2018.
The speed, or lack of it, with which rates are expected to rise reflects continuing uncertainty over the outlook for the UK markets and economy. The outcome of Brexit negotiations remains entirely unclear. Weakness in sterling will continue to contribute to inflation, which is expected to keep exceeding the MPC’s target.
However, the Bank forecasts inflation to peak at a little below 3 per cent in Q4, before falling next year as the currency effects wash through. For now, it is willing to wait that out, arguing that to do otherwise would risk weakening already low income growth and come at the cost of higher unemployment.
However, that uncertainty also means things could quickly change. If wage or CPI inflation starts to take off more rapidly or, in the case of CPI, does not slow next year, we could see rate rises sooner – and more quickly – than currently forecast.
Alex Maddox is product and capital markets director at The Northview Group