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I can hardly believe that next month is December, which means that 2010 is nearly upon us. At the start of this year I assumed that interest rates would only be low for a few months before rising sharply, back to a more normal range of 3-5% - how wrong I have been!

With the economy still not fully recovered from the effects of the credit crunch, and many experts believing that we still have more doom and gloom to come, I can only imagine that the Bank of England base rate will not be rising for a long time to come.

The worst case scenario from what I can make of it all is that the base rate will start to rise sometime in the 2nd quarter of 2010, but the best case scenario is that all through 2010 the base rate will remain at it’s current low level.

For the base rate to rise, the economy has to start inflating again, something that it shows no signs of doing just yet. And even when the economy does start to grow, it will be quite a while before the inflation rate exceeds the 3% maximum target set by the Bank of England. With that in mind I think I have to revise my earlier interest rate predictions for 2009 - 2010, which I predicted the base rate would rise steadily during 2010. I believe the economy hasn’t recovered as quickly as was predicted back in January of this year, and as such the base rate will have to remain at its current level for quite some time to come.

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I was in my local branch of Natwest Bank today, I won’t bore  you with the mudanity of what I was doing – opening a business savings account if you must know – but I had a very interesting chat with the business adviser in the branch who deals with all aspects of their products, savings, investments, mortgages and so on.

He informed me that he had received an internal memo recently from Natwests’ in house economic forecasters stating that they felt the current low interest rates which most of us borrowers are benefitting from should last until the end of 2010.

I was quite shocked, but very pleasantly surprised by this, as I had predicted that interest rates would rise during 2010. If we do see the current 0.5% BoE base rate until the end of next year, then my predictions will be completely wrong – not that I mind, I have a mortgage and am quite enjoying paying just over 2% on my mortgage.

This will mean misery for the hundreds of thousands of pensioners who have significant savings in their savings accounts, and in fact, while I was in Natwest sorting out a savings account for my corporation tax, I was rather amazed to find out that I will be getting a whopping 1.25% interest on my savings – hardly seems worth it really!

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I hear on a regular basis about how the economy is ruined and how everything is going wrong, with house prices falling rapidly and lenders only approving 10% of the mortgages in Jan 2009 as they did in January 2008, so it would be natural of me to assume that house prices would be very low currently. Wrong, I looked at house prices near me recently and they are still very expensive.

I then decided to look into the cost of mortgages, by looking at some comparison websites and I was staggered to find that even though the Bank of England base rate is at an all time low of 0.5%, you could not borrow money for less than 4%, and this is despite the fact that the UK government now owns a controlling interest in most of the high street lenders, and has lent money to the rest!

You would think that if the government of this country knew what they were doing, they would have insisted that before they lent money to or bought into the failed UK banks, they would have got some cast iron contracts in place to ensure that the monetary policy the Bank of England is pursuing would be translated both in terms of existing tracker or variable rate mortgages, but also new lending.

It seems they didn’t, and as such the UK taxpayer has simply been taken for a ride by the banks who are now sucking up this “aid” money from the UK government and doing nothing with it other than increasing their capital reserves. The whole point of the government stepping in was to ensure that a, the banks didn’t fail, and b, that they started lending money to people (and not just the AAA rated people that didn’t really need to borrow money, everyone), and c, that they started lending money at sensible rates of interest.

So why has this not happened? I can only assume that as with Sir Fred Goodwin of RBS, the government have been taken for a ride - when will they learn not to trust city bankers?

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The base rate announcement will be tomorrow lunchtime, at midday, but what will it hold for mortgage holders and savers alike? Will it be good news in the form of cheaper mortgages, at the cost of even worse returns for savers, or will there be a base rate rise?

According to the latest inflation report, February 2009, inflation in December 2008 stood at 3.1%, which is significantly down on what it was the same time a year ago. The predictions stated in the report point to a gradual reduction in inflation over 2009 with it falling to below the Bank of England target (2%) by early 2010.

If this does happen, and the wider economy seems to be on the mend, then we could be in for a gradual increasing of the base rate from early 2010 onwards. However, predictions made in an inflation report published mid February 2009 will not necessarily still be valid come February 2010 - way back in January 2007 the outlook was still very rosy, the same time 2008 and things were somewhat bleaker.

My prediction is that the MPC will leave the base rate as it is at 1%, and wait until they have seen further evidence that the economy is starting to get better. They could be waiting a long time for that to happen, so we could be in for a prolonged period of low interest rates.

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The Bank of England Monetary Policy Committee meets again next week (5th Feb) to determine what level to set the base rate at. Like many I’m now keenly following the latest news on interest rates as it’s having a noticeable effect on my monthly outgoings, so I thought I’d share my predictions on what the bank of England base rate is likely to be in the coming months.

In January many economists and business leaders were expecting the Bank of England to drop the interest rate by a whole 1%, instead however they elected for a 0.5% drop, which I believe is a sensible choice. Yes we still need a lower rate to stimulate the economy, but too many drops that are greater than 1% could harm what little confidence is left in the markets and perhaps more importantly we will reach 0% very quickly, at which point the only option left is printing more money, which if it comes to that, will probably do more harm than good.

Therefore my bank of England base rate prediction for February is a drop of 0.5%. I predict we will then see a drop of 0.5% or even 0.25% in March, followed by a possible further 0.25% drop in April taking us down to a low of 0.5%. I don’t believe the MPC will wish to take the interest rate below 0.5% if it can be avoided. Over the longer term I still more or less agree with Tristan’s earlier interest rate predictions.

If my predictions are right it’s more bad news for savers, but great news for those of us with tracker mortgages.

So, what do you predict?

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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.

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