The big question concerning many borrowers is ‘will the Bank of England raise interest rates anytime soon?’ The Bank has historically decided interest rates on a month-by-month basis but newish Governor Mark Carney has opted for Forward Guidance instead, giving a longer-term view. This strategy is designed to help markets and businesses plan ahead more effectively, bringing the Bank into line with the US Federal Reserve and the European Central Bank.
Recent figures from the Council of Mortgage lenders show a further rise in lending, continuing to provoke discussion about an interest rate rise being brought forward to the end of 2014 or early 2015, as opposed to the original plan of 2016.
So what does this fresh thinking at the Bank mean for mortgage holders?
Well if the base rate looks set to rise, money market or Swap rates start to edge higher. As lenders use these to help decide their pricing, it means fixed rates tend to go up even before official interest rates.
So let’s take a look at the likelihood of interest rates rising any time soon, by reflecting on the criteria to be used for raising interest rates.
If unemployment in the UK falls below 7 per cent
By the Bank’s calculations, that will require the creation of another 750,000 jobs, which is unlikely to happen for at least another three years. Around 2.51 million Britons are unemployed, giving a jobless rate of 7.8 per cent. Strong employment is seen as a bellwether of a healthy economy. If more people are gainfully employed, their spending power increases, thereby stimulating the economy, which in turn can cope better with higher interest rates.
Take note this is a threshold rate, not an immediate trigger for an interest rate rise. So even if unemployment dips below 7 per cent, the Bank of England will take other measures into consideration as well.
Inflation will also be taken into account. Officials will want to dampen inflation and will watch to see if the Consumer Price Index (CPI) breaches the 2 per cent target. In addition, the Bank of England is not going to want to push borrowers over the edge by raising interest rates at a time when many are struggling with the cost of living.
Consistent, sustained, economic recovery – which is believed to be underway – would also help the interest rate-rise argument. However, the economy is still weak by historic standards, such has the buffeting by the financial crisis been.
We can also watch out for indicators along the way. What happens on the programme of quantitative easing (QE) will partly signal forward intentions. The Bank has pledged not to scale back its £375 billion economy-boosting programme, while the economy and unemployment figures are less than desirable.
Where do we come out on this mortgage rate debate?
At Anderson Harris we don’t think that interest rates will rise for a couple of years yet, at least, but if you are a risk-averse borrower and want to know the best course of action to take and whether to fix your mortgage, please get in touch so we can advise what’s best for you.