Bank of England lowest interest rate projections yet

by Neil Patterson

4 years ago

Bank of England lowest interest rate projections yet

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Bank of England lowest interest rate projections yet

What most Landlords are interested in, because many have Buy to Let mortgages, from my Bank of England quarterly inflation report summaries is what might happen to interest rates in the future.interest rate

Well the good news if you are hoping the rate stays low is that the latest report shows the lowest predicted medium term rates on record. Please see the graphic depiction of this below indicating a more gradual increase in UK and international interest rates:

interest rate

The Governor of the Bank of England, Mark Carney, has even reversed the statement that the Base rate could not fall below 0.5%. This is because since the credit crunch Banks have recapitalised enough to withstand a reduction in their margins if the rate fell to 0.25%.

The reason why bank margins would fall is that loan rates such as trackers would decrease, but the rates they have to pay to savers are “sticky” as you can’t attract funds without paying something.

Long term interest rates have continued to fall since late 2013 with the “ten year spot rate” (the cost of government borrowing) having fallen 0.75% to 1.5%.

This is on the back of UK inflation falling to 0.5% which is 1.5% below the medium term target inflation figure of 2%. This triggered an open letter to the Chancellor setting out the factors weighing on the CPI inflation rate. The biggest factor was the reduction in oil, energy and food prices with 70% of prices in the CPI inflation basket not reducing. Hence if you take out oil, energy and food then the underlying inflation rate is 1.1%.

Therefore we are not in a period of deflation, as some have reported, because for this to happen all or most prices would have to be falling not a minority as at the moment.

It is considered that a short period of low inflation could boost the economy with real wages rising causing an increase in consumption.

The good news for low interest rates is that the above predictions shown in the chart for rate rises have historically (since 2008) erred on the side of caution and always predicted future rates to be higher than has turned out to be the case.

This is largely because the assumptions for growth do not take into account political influences (of which there are many such as Greece, Russia, Oil price recovery etc.) that are likely to dampen the economy.



Comments

Mark Alexander

4 years ago

Hi Neil

If I am reading this correctly the BoE is predicting an base rate of 1% by the end of this year, 1.5% by the end of next year and topping out at 2% in around three and a half years from now, i.e by summer 2018?
.

Neil Patterson

4 years ago

Errr no Mark I am pleased to tell you that you are reading the wrong line.

The dashed lines are the old predictions and the solid blue line is the current.

I hope I have improved your day 🙂

Mark Alexander

4 years ago

Reply to the comment left by "Neil Patterson" at "13/02/2015 - 11:48":

Even better - happy days 😀
.

Jason McClean

4 years ago

Another excellent article Neil!

If you can arrange for interest rates for borrowing to be reduced it would be much appreciated, but I doubt any drop in Bank of England interest rates will be passed on to us mortgage owners.

Shakeel Ahmad

4 years ago

Couple of remarks.

a) Would this not make the Banks think of increase of margin, in light of Mark V WBS.

b) The rates maybe low. In my experience the lending is very tight & if you are not a first time buyer & one of the many boxes do not get ticked. You will not be entertained by the under writers as I call them the under takers.

Michael Barnes

4 years ago

Reply to the comment left by "Jason McClean" at "13/02/2015 - 16:09":

not if you've got a West Brom tracker 🙁

Anne Nixon

4 years ago

As Jason McClean comments this will be unlikely to affect the amount people pay on their mortgages.

Just a quick query to those who understand this better than I do - is it not the case that the mortgage companies will be paying lower interest on their LIBOR borrowings so their differential, their 'mark-up' if you like, should be the same no matter what the BOE interest rate is at the time - ie. isit just the fact that they are wanting to raise their profits, not that they took a hit when low interest rates came in? Thanks

Alan Loughlin

4 years ago

if rates go down a bit more the banks will be paying us for mortgages, now there is a thought.

Sam Addison

4 years ago

Thanks Neil. it is a comforting thought that interest rates are unlikely to change noticeably over the next 2 years or so - HOWEVER, all must remember this is a forecast. There are plenty of things in our modern global economy that can send things haywire. (Ukraine? Greece? Syria? etc. ) I am sure Mark is still keeping his liquidity up!

Neil Patterson

4 years ago

Reply to the comment left by "Anne Nixon" at "14/02/2015 - 09:23":

Hi Anne,

You are correct that Libor rates should be lower as well so the banks margin on borrowing will be roughly similar. However, the rate they pay on deposits can only go down so far to attract these funds that can be used for borrowing, so it is likely that as rates get close to zero then their costs will increase.

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