Interest Rate Predictions Tristan on 14 Jan 2009 10:04 pm
With the Bank of England base rate being cut last week to 1.5%, meaning the base rate is at it’s lowest level ever, I think it’s worth having a think about some predictions of where the base rate may head in the coming year.
The first thing that I think is worth noting is the state of the economy, as I believe this is driving the interest rate decisions by the Monetary Policy Committee. As is stated on the Bank of England website, the job of the Monetary Policy Committe is to set interest rates such that the inflation targets can be met.
However, the inflation target on the Bank of England homepage is 2%, and the current inflation rate is 4.1%, so clearly at the moment it’s not just the inflation rates that are influencing their decisions. With a new inflation report due out in six days time, which may provide evidence of falling inflation, it could be a little quick to judge the decisions made so far.
The second thing that I think is worth noting is the state of the credit markets. The banks are still not lending to each other, as they are still worried about the levels of exposure to “toxic debt” that each may be concealing. In light of this, the libor rates are still very high compared to the base rate. Will we see new mortgage lending rates coming down in line with the base rate? Will the banks start lending money again, such that the economy may make a swift recovery?
Base Rate Predictions 2009
My predictions for this year are that the base rate will in the first half of 2009 fall down to 1%. This may be in 0.25% steps spread over the following five announcements. We’ll then see at least three to six months of base rate at 1%. In the final quarter of 2009, we may see a 0.25% rise, if indicators about the economy are positive.
Base Rate Predictions 2010
For 2010, I think the base rate will slowly rise in the first six months, probably to about 1.5%, gently increasing the cost of borrowing, to try and slowly halt any inflationary pressure that may build up in 2009. Assuming we’ve had one and a half years of unprecedented low interest rates, in the second half of 2010, I think we may see some big jumps (half point / three quarter point) to bring the base rate back up to 2% 2.5%. Bearing in mind that as recently as November 2007 the base rate was at 5.75%, this is still unusually low.
If you would like a FREE online quote, click here now.