Interest rate predictions

[AlfieNoakes]

After reading the 'Economic Trend' thread, I gather there are a fair few on here with seemingly well informed opinions on financial matters.

So, as a homeowner of only a few years who was not paying attention during the previous recessions, I am curious as to where people think rates will go over the next couple of years.

Accepted wisdom seems to say that they must increase, and may increase sharply, possibly to double figures. Is this inevitable or are conditions 'different this time'?

A quick Google offers this:

"Economists - according to a Reuters poll in early August - expect the bank rate to stay pegged at 0.5% until next May/June followed by rises taking the rate to 1.25% by the end of 2010. "

From here: http://www.thisismoney.co.uk/interest-rates

What say the Drawing Room?

[SeanMacGabhann]

I would say things are "different this time"... for now (say the next 3-6 months) and we won't see much upward movement

Depending on how things pan out, it may then revert back to previous steep hikes

That said, having a new government may kickstart a new "outlook" even tho the Bank has had independance for the last 12 years

[louisiana]

Some comments, that may not answer your question to your satisfaction.

Many commentators expect rates to go up.

A few say they will not, yet.

If they do, all the people that thought they were almost up s**t creek, will be.

To keep a weather eye on what is developing, why not read The Automatic Earth blog?

I'd say

- if you have debt, get rid of it as soon as you can.

- if you don't have debt, don't get any.

In times of uncertainty, debt is a high-risk situation.

[AlfieNoakes]

That's kind of my thinking. The gains I'm making now, I'm stashing away in case rates go the other way in a year or two. It would be nice not to have to though.

Aside from my personal situation though, I can think of many who will be in real trouble if we saw base rates reach 6%+. Surely this would have a massive impact on the economy just as we hope to be limping out of recession.

Can the government / BOE avoid this? Would they want to?

[SteveT]

Alfienoakes wrote:- Accepted wisdom seems to say that they must increase, and may increase sharply, possibly to double figures. Is this inevitable or are conditions 'different this time'?

They certainly will rise you can back your money on it, and it was not too long ago since they were 12%.

The conditions are different this time as its much more widespread, and the pound is lower in value, which makes it a

greater burden of debt to clear.

[????]

For sure they'll go up as they almost can't go any lower and they are at the lowest they've ever been, so the question is when and how far...I don't think looking at the last recession (or indeed the one before that) is much good as an indication of rate underlying inflation was at a considerably higer rate then . The economy is extremley fragile and households and companies still enormously indebted and a major hike would be catastrophic...and yet because of the state of the public finances and our overall economy the pound has weakened considerably, which is itself inflationary...a susatined run on the pound may result in interest rates having to go up quickly and that would be potentially disatrous, so whilst we are still on the edge of disaster, and I think we are still, the government will try and keep interest rates as low as possible for as long as possible...way into next year if they can, but "events dear boy events". Moving upward from April is my guess....up to 6ish% by 2011

[????]

...by the end of 2011 to clarify

[Jeremy]

I wouldn't be surprised if we started seeing a gentle rise in rates this autumn.

[????]

I think if the economy starts to grow with ant convincing momentum you could well be right

[casper]

Rates will start to rise the middle of next year and go relatively quickly to the 3.5-4% range. With banks still charging wide spreads on their mortgage product rates at this level will still put fixed and variable rate mortgages at 6%+.

Past that its a complete guess. We either stabilise and with the enivitable fiscal drag inflation will stay under control and rates will stay under 5%. Very small risk of out of control inflationary bubble when rates could go to the moon, but v v unlikely.

[HAL9000]

The outside chance is that this is a three-wave down cycle, which would mean that we are not even half way to the bottom yet. The down turn in the US, whose cycle seems to be running ahead of us, is already experiencing a second wind. A fall in the value of the pound (and dollar) may be inevitable if inflation is seen as an acceptable debt repayment policy. In which case double-digit inflation/interest rates are likely to drive the third down wave.

In any event, past recessions are all but worthless as guides to the current situation: this is not a regular bear market - we are in the aftermath of previously untested rescue measures cobbled together following the collapse of a global asset super-bubble. Those measures could still fail or even precipitate unintended consequences that are worse than the original problem.

Forecasting is no better than guesswork at the moment because we don?t have a functional model of this economy. We didn?t even have one for the pre-crisis economy; otherwise we could have prevented its collapse.

[macroban]

I hold to my stance that one should watch the Gilts market for future trends in interest rates. This despite it now being a distorted market due to QE and BoE buy-backs.

There is an assumption going the rounds that we are on the down-leg of another recessionary cycle. I am scratching my head trying to identify any sort of evidence that this is not a permanent step-change-down in economic activity.

[Jeremy]

Macroban, it's not like you to be so pessimistic regarding the economy!

Historically the economy has always been cyclical... you are asking for evidence that this is still the case. Conversely, I would say that if you are taking such an unorthodox view, the emphasis should be on *you* to find evidence to support your case!

Personally I don't think we're on the down-leg, I think we're at the trough. We will see...

[MrBen]

My guess is broadly inline with Casper and quids. Speed of rate hikes is critical - too fast and we risk the so called double dip and too slow and we won't get anywhere. With a general election coming up no government is going to want to rock the boat either before and especially after. Whether BOE set the rates independently or not.

So taking a wild stab - rate increases to start in Feb 2010 after the "we're over the worst" data is felt in early spring-slowly increasing slowly into 2011 and peaking at around 5-6% base for this cycle. With mortgage rates up to 8% which is enough to start hurting and likely to keep housing depressed / stagnant for another 5 years.

[macroban]

Jeremy:

I'm mildly optimistic at the moment. After a little more pain for the next 18 months or so I can see a period of stability which will enable young people to do sensible financial planning. My reasons belong in another thread.

I appreciate it was a wind-up but I did not say that economic cycles of "boom and bust" would not continue after a step-change-down.

And to keep on-topic:

I expect base rate to revert to a 2.5% to 5% range with LIBOR no more than 50 basis points above this and lending rates to credit-worthy personal customers to be in the 6% to 8.5% range. I do not expect any significant movement towards these figures until after the General Election unless there is a Gilts strike.

[womanofdulwich]

Wow-you all sound soo wise- so if you are lucky enough to have a low mortgage that is at 1.5% above base for another 15 years on a small amount -should you pay it off asap or stick it somewhere else? ie unit trust s etc and wait until interest rates go up on your mortgage and then pay it off?

[macroban]

You would be unwise to take any action based on speculations about future interest rates that you read here.

You might like to try stress testing your personal finances with base rate at 5%, 10%, and 15% and then, when you have looked at these scenarios, seek professional advice tailored to your personal circumstances.

[womanofdulwich]

I know, but I think they are all trying to sell me products and get a hefty commission. I expect as usual there is no right answer- just make the best decision you can and then live with the consequences. Any recommendations for financial advice macroban?

[macroban]

[Advance apologies to The Chair]

Buy half an hour from an IFA who does not work for commission.

[womanofdulwich]

any recommendation for an IFA that does not work on commission? Are we talking ?200 an hour? Should post this elsewhere I suppose. Thanks anyway.

[Mick Mac]

base rates of 10 and 15%? Im tempted to post that to the lol posts macroban. But i have more manners.

[macroban]

My "prediction" is for 6%-8.5%

10% and 15% are suggested bad and worst case stress testing scenarios for womanofdulwich.

Base rate peaked at 17% in November 1979 when there were problems with the UK economy as I am sure you will remember.

[Edited for simplification]

[????]

yup but inflation was about 13% tben not 2.5%

[Mick Mac]

anyone who bases their financial planning on a 15% rate is likely to make only the most ultra prudent of financial decisions and not make the most of their available capital and borrowing capability .

[womanofdulwich]

so do I keep overpaying each month by the amount that I am allowed to ( that allows me to take it back as cash at any time) or seriously overpay and clear mortgage with ( admittedly not looking too good endowments ) that will soon come in? 1.5% above base seems cheap money for a mortgage but I am struggling to think of where to put the extra for the next few years to earn more ( that is a safe place)? Come on you gurus - share your knowledge with me please.