Rates to Banks to Hold at Low Levels Another Year or So!

But Banks Will Start to Raise Rates Soon.

Economists expect the Bank Rate to rise in early to mid 2015 – but economists’ predictions have consistently missed the mark.

Mark Carney, governor of the Bank of England, has indicated repeatedly that interest rates will not rise until people and businesses begin to share in the economic recovery. This has not helped bring clarity, either.

But there are signs that banks are already starting to price a rate rise into their deals, particularly fixed-rate mortgages. There are two main reasons for this. Firstly, cheap loans through the Government's Funding for Lending scheme (FLS) can no longer be used for mortgages. Secondly, the pricing of fixed rate mortgages is influenced by markets that reflect future interest rates, and today they price in a greater chance of rate rises than they did a few months ago.

Five-year fixed rate mortgages have edged up from their record lows of 2.44pc in July 2013, to just under 3pc now.

Savings rates are also slowly edging higher, although so far by disappointingly little. Savers have a long way to go before rates return to pre-crisis levels.

Capital Economics believe rates will remain fixed at 0.5pc for at least a year. It is a forecaster worth listening to: most economists took years to grasp that the era of low rates was with us, repeatedly since 2009 predicting "rates to rise next year", but Capital Economics was far more dovish than the rest.

Samuel Tombs, Capital's UK economist, said: "The MPC’s decision to leave interest rates on hold, marking five years since they reached their record low, is likely to be repeated many more times. With recent news suggesting the MPC’s estimate of spare capacity is too conservative, we think the sixth anniversary of 0.5pc rates will be marked next year.

"While we do not like to blow our own trumpet too often, forgive us for recalling that we argued in 2009 interest rates could stay at 0.5pc for as long as five years in response to prolonged fiscal tightening, weak bank lending and a sluggish recovery. Indeed, we are one of the very few forecasters that never predicted a rate rise in this period. For instance, at the start of 2010 we were one of only two forecasters predicting that rates would still be at 0.5pc at the end of 2011."

He says divisions are emerging on the Monetary Policy Committee with Martin Weale, a member, wondering whether pay growth may return meaning the need for a rate rise in the next year. But Mr Tombs says the recent rise in unemployment and the fall in inflation to 1.9pc are meaningful ammo for rate doves.

He concluded: "The case for thinking that the recovery can continue for some time without prompting inflationary pressures to build has been strengthened by recent news. As a result, we continue to think that the MPC will be able to leave interest rates on hold until late next year."