UK Base Rates
Interest rates have fallen to a a record low because the economy has experienced its deepest recession since the 1930s.
The Bank of England have kept interest rates at 0.5% since March 2009
Factors which will keep interest rates close to Zero in the future.
- Depth of recession and scale of fall in GDP
- Predicted rise in UK unemployment close to 3 million
- Budget Deficit rising to 12% of GDP means the government is under pressure to improve fiscal position. This will require higher taxes and lower spending. This fiscal stance could damage recovery and is deflationary. Therefore if taxes rise, it is more likely interest rates will stay low.
- Inflation predicted to fall below the governments target of 2% and stay close to 1%. In 2010, there may be a temporary rise in inflation due to rising oil prices and tax rises, but, this does not reflect a fundamental increase in inflationary pressures. The underlying state of the economy means there is a lot of spare capacity and little inflationary pressure. This is one of the main factors which will enable interest rates to remain very low.
- Given this gloomy outlook for the UK economy, the Bank of England are forecasting low inflation and low interest rates in 2010.
Graph showing Interest Rate Predictions
Bank of England Interest Rate Forecasts
Source: Bank of England latest inflation report [link
This suggests many analysts believe official interest rates could stay at 0.5% during 2010.
I believe it is hard to see interest rates rising before end of 2010.
Factors which will push up Interest Rates
- Scale of Quantitative easing (increasing money supply) increases potential for future inflation. As inflation rises, interest rates could rise sharply. However, the impact of quantitative easing has not been fully understood. Broad money growth still shows slow growth. It is likely quantitative easing will be brought to a halt soon.
- UK housing market could be bottoming out leading to slow recovery in house prices. House prices rose 6% in 2009, but in 2010, we could see a further fall or at least stagnation in prices
- As economy recovers at end of the year, the historic rates could rise to prevent inflation.
- Signs of rising oil prices
The forecast for interest rates depends on how strong and robust the economy recovery is At the moment, economic conditions are conducive to low rates for several reasons.
- Weak housing market
- ongoing credit crunch and reluctance to lend by banks
- Negative economic growth of -4% in 2009, and relatively weak growth predicted for 2010.
- rising unemployment – over 2 million and approaching 3 million
- Credit crisis reducing availability of credit
- MPC inflation report forecasting inflation of 0.7% and likelyhood of very low inflation in 2010
Factors Influencing interest rates in 2010
- Real interest rates are actually negative. Real interest rates are (Nominal interest rates – inflation) = 0.5% – 2% = -1.5%.
- Sub Prime Mortgage Crisis - The effects of the mortgage sub prime crisis are still being felt in the UK, in particular there is a shortage of mortgage credit. The main effect of the sub prime mortgage problems are to make mortgage lenders less willing to give risky loans. It has also affected consumer confidence. The effect of these two factors are to reduce house price growth and consumer spending. This reduces inflationary pressures and makes it easier to enable interest rate cuts.
Fixed Interest Rate Predictions
Despite base rates staying at 0.5%, fixed rate mortgage deals have not reflected the low interest rates. The Bank of England’s figures suggest the average 2 year fixed rate deal climbed to 4.46 per cent during July. Yet, with forecasts for interest rates to remain close to 0%, this suggest the banks are increasing their profit margins. They shouldn’t really rise more, but, weak competition is pushing fixed rate mortgages slowly up.
Predictions for US Interest Rates
As for the US, interest rates have already been cut to 0% – 0.25%, but, this may be insufficient to stave off the problems arising from the US Housing Market. However, with rates at 0.25% there is little more that they can do. Although the economy shows signs of tentative recovery, base rates are likely to remain low for a while.
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14 comments ↓
good insight to the UK market
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Seem like the market is picking up and we will expecting for good year for 2010.
[...] It is expected that interest rates could be kept at the low rate of 0.5% for 2010. You would have thought that because interest rates are low, then the rates for mortgages would be low. But the greedy banks are just using the low interest rates as a way of making more money. The high interest rates could put home buyers and property buyers off during the year. During 2009 property prices were driven up by the lack of supply, but with the prices higher more people could decide to sell. If this happens prices may dip during 2010, I think the best thing to do is watch the people work investing in property as it is their livelihood to know what is going on. [...]
[...] It is expected that interest rates could be frozen at 0.5% for 2010. You would have thought that because interest rates are low, then the rates for mortgages would be low. But the greedy banks are just using the low interest rates as a way of making more money. The high interest rates could put home buyers & property buyers off during the year. During 2009 property prices were driven up by the lack of supply, but with the prices higher more people could decide to sell. If this happens prices may dip during 2010, I think the best thing to do is watch the people that invest in property as it is their livelihood to know what is going on. [...]
quetions – I have no devt other than 2 car payments and a small equity loan – interest rate -adjustable @ 2.99% – question Should I take the 2 car loans@6.2%
and move over to the equity line. What preductiuons for sub prime rate in 2 years? or even 2010?
Any advice??
Thanks for the interesting post, its great to see a break down like that, I have to say that we hear on the news how badly Europe was/has been effected by the recession, and it really is sad, all we can do is just hope that things start looking up this year and that the markets also start picking up.
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