When will interest rates rise?

Graham_Devon

Well economists were wrong.

And then they were wrong again.

So maybe it's time to reappraise your finances now that the economists are saying something different and base your finances on what they now say? Maybe you should pay a fee of up to 3% to dump your fix and move on to a tracker to make the most of low rates?

This week, for the 30th month in a row, the Bank of England held the base rate at 0.5%, and economists predict the first interest rate rise won't be until at least 2013. If we are now heading into a Japanese-style era of ultra-low rates to combat a depressed economy, is it time for households to fundamentally reappraise their personal finances?

As recently as the beginning of this year, the consensus view in the City was that "emergency" low rates would start to rise within months. In late January, the money markets were pricing in three 0.25% rate rises by the end of this year. It didn't happen.

Now the mood among financial experts has turned dramatically. Across the developed world, economic indicators are flashing red, and some forecasters believe the base rate will remain at its record low for many years.

http://www.guardian.co.uk/money/2011/sep/09/when-will-interest-rates-go-up-again

Some are even suggesting while Mervyn is governer, there simply won't be a rate rise.

Interesting article anyway. Just wonder how they can suggest listening to the experts and realigning your finances, when they start the article stating the experts got it wrong, since 0.5% base rates, not once, but twice. 3rd time lucky I guess.

Edit: We've even got a forum regular in the comments section, with another piece of advice. Quit the pension contributions if you want to afford a house. Lightbulb moment me thinks.

michaels

Graham, I feel we have discussed this before, possibly with some polls. Would you mind doing a search and linking a few old threads as it will be interesting to see what we have said in the past. Thanks

OptionARMAGEDDON

Not until the banks are recapped. 2015 at the absolute earliest for the start of normalization. Sub 1.5% until then imho. Hence why I went on a tracker last year and loving every minute of 2.49% base rates.

Graham_Devon

Is this not where policy gets dangerous though? When people start assuming rates simply won't rise, and pay 3% mortgage fee's to bail out of their fixes, and further mortgage fee's to move onto a tracker?

Apathy setting in? More and more households at the mercy of interest rates increasing, and mainstream papers suggesting it could be a profitable one way bet?

I read an article the other day pretty much praising the fact we are looking to go the way of Japan, simply because it would be great for mortgage payments.

Cleaver

Graham_Devon wrote: »

Is this not where policy gets dangerous though? When people start assuming rates simply won't rise, and pay 3% mortgage fee's to bail out of their fixes, and further mortgage fee's to move onto a tracker?

Apathy setting in? More and more households at the mercy of interest rates increasing, and mainstream papers suggesting it could be a profitable one way bet?

Not sure for how many, but for some people it's maybe not that much of a big concern. At 3.99% (our current fixed rate until 2015) our mortgage interest represents around 7% of our monthly income. If we went on to a tracker at, say 2.5%, the mortgage interest would represent around 4% of our monthly income. If our mortgage rate went up to 6% overnight we'd be paying 10% of our income on our mortgage interest.

So I know we're not representative of everyone, but there must be quite a few people who are quite apathetic about the whole fixed / tracker debate as it doesn't make that much difference in the grand scheme of things. When we fixed for five years at 3.99% around a year ago or so I kinda thought that we might be better, financially, on a tracker. But I like the security. And, to be honest, it ain't all that different really in terms of the percentage of our income. We know what our mortgage payments will be until 2015, which makes me feel secure.

Cleaver

By the way, I'd be more than happy for the base rate to be 5% it it meant we had a thriving economy, lower unemployment and a stronger economic situation that other countries. Seems a fair trade off for a slightly higher mortgage.

globalds

Graham_Devon wrote: »

I read an article the other day pretty much praising the fact we are looking to go the way of Japan, simply because it would be great for mortgage payments.

I don't think the UK would be allowed to lend enough money to do a Japan.
Regardless of Japan's financial doldrums and lack of fiscal balls ...They do run a surplus

http://www.bbc.co.uk/news/business-14568890

Who would lend to us for the next 10 years as we continue to dig a deeper hole for ourselves ?

HAMISH_MCTAVISH

Cleaver wrote: »

By the way, I'd be more than happy for the base rate to be 5% it it meant we had a thriving economy, lower unemployment and a stronger economic situation that other countries. Seems a fair trade off for a slightly higher mortgage.

Spot on.

Rates will rise when the wider economy is in a better condition, as they should. And when the economy is recovering more strongly, rising rates will have little impact on most people.

But calling for premature rate rises, which will worsen the wider economic situation, is pointless.

OptionARMAGEDDON

Where is the growth coming from? Deficit reduction is the top priority, over everything else, including inflation. Once the pain of cutbacks are over, we as a nation will require growth to decrease the deficit figures. This can only happen with low rates, so, IMHO, until the next election at least, we will not see rates rise.

Mervyn king was implicit; the reduction in government spend was essential for economic stability. We can see the effect in bond yields at the moment. The other part of the equation comes from the BOE, who are not going to raise rates until they are absolutely certain.

See it this way Graham, the olds in the main are the ones holding the cash. In the grand scheme, what the BOE are trying to achieve is a rebalancing of assets from the old ( cash rich) to young (cash poor) through the medium of inflation. We all know house prices arent going anywhere but down, so what are you worried about? Find a decent place to store your cash (NS+I bonds?) sit back and enjoy life. Either that or go out and buy a house. The inflation we are experiencing is trashing the value of the pound in your pocket and will continue to do so for the next 12 months at least.

globalds

Is the B of E going to be allowed to ignore inflation for the next 3 years?

Graham_Devon

globalds wrote: »

Is the B of E going to be allowed to ignore inflation for the next 3 years?

I believe they have already stated inflation is now not the priority. One of Mervyn's speeches.