When Will Interest Rates Rise?

With UK interest rates at record lows, many are wondering how long they will remain close to zero?

If the experience of Japan is anything to go by, very low interest rates could last 10 years. However, I think it is unlikely that the UK will repeat the Japanese experience of a decade of deflation and zero interest rates.

The UK has pursued a policy of quantiative easing (increasing money supply). So far the effects of quantitative easing have proved difficult to evaluate. Even the Bank of England say it will take time to know what impact on the economy it has had. However, this increase in the money supply increases the chance of economic recovery and in particular inflationary pressure.

Also, since the start of this year, commodity prices, especially oil, have started to rise. These price rises will put upward pressure on headline inflation and also indicate the chance of a global economic recovery.

In the UK economy, economic data is still mixed. On the one hand, the large decreases in output seem to have faded out and there are tentative signs of recovery. Yet, at the same time, unemployment continues to rise and this is likely to depress consumer spending into 2010.

The medium term inflation forecast still points to the many deflationary pressures in the economy and inflation is forecast to remain below the governments target of 2%.

At the moment, any economic recovery is likely to be L shaped rather than V shaped. (This means we will not bounce back but experience a period of sluggish economic growth as we deal with the legacy of the credit bust and great recession.

For the moment, interest rates are likely to remain very low. Looking into 2010 it becomes harder to predict. Quantitative easing remains an unknown quantity and the inflationary impact remains uncertain.

Whilst interest rates will probably stay low for a reasonable period, I would still say this would be an excellent opportunity to get a fixed rate mortgage.