Interest rates predictions: When will the Bank Rate rise?

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3:12PM BST 18 Sep 2015
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Bank Rate, at 0.5pc for more than six years, looks set to remain fixed until well into 2016, according
to markets. It could be far longer, as we explain below.
Take a look at the Bank of England channel for in-depth coverage of the Bank's latest views on the
economy. Below we boil it down to the predictions and explain what it all means for savings and
mortgages.
This guide is updated as events change: Follow rate alerts on Twitter

What are the latest predictions?

The Black Monday crash marked the beginning of a new phase on interest rate predictions. A new
gloom has seen the market three times predict that a rise in the UK Bank Rate won't arrive until
November 2016.
However, figures this week showed UK pay rises had moved higher which spurred the market to
pencil in July 2016 for the first rise. That back to a prediction of September 2016.
Part of the reason was Bank of England chief economist Andy Haldane, arch dove of the monetary
policy committee saying that the case for UK raising interest rates is "some way from being made"
and that negative rates may still be needed.
Vicky Redwood of Capital Economics explains: "The acceleration in the annual growth rate of
average weekly earnings from 2.3pc to 3.7pc in July was certainly eye-catching. Admittedly, this
partly reflected a strong rise in bonuses, which have been a bit erratic recently. Nonetheless, even
excluding bonuses, annual growth rose from 2.8pc to 3.2pc, the strongest rate since 2008.
"So no wonder the figures prompted renewed speculation about a UK rate hike soon, with financial
markets initially bringing forward their expectations of a hike from around November, to July 2016.
That said, some of this movement has subsequently been reversed."
The chart below shows the market's prediction for the first rise in rates. It is explained in more depth
below.

http://www.telegraph.co.uk/finance/personalfinance/interest-rates/11032396/Interest-rates-... 9/22/2015

Interest rates predictions: When will the Bank Rate rise? - Telegraph

How quickly will rates rise?

Even after the first rise, the market is pricing in only very slow increases, far slower than seen in
previous cycles of rising rates (set out in the chart below), expecting a return to 3pc not until 2025.
Capital Economics expects a rate of 1pc by the end of next year and 1.5pc by the end of 2017.
The Bank of England's quarterly Inflation Report on August 6 (more on this below), captured market
forecasts: a rate of 1pc by autumn 2016, 1.7pc by 2017 and 2.3pc by 2018.
Some analysts have said rates may not rise until 2017.
Note: This chart shows predictions for interest rates, as of late July:

http://www.telegraph.co.uk/finance/personalfinance/interest-rates/11032396/Interest-rates-... 9/22/2015

Interest rates predictions: When will the Bank Rate rise? - Telegraph

The recent history...

The Bank of England's quarterly Inflation Report (August 6) showed how rate expectations have
shifted recently.
The chart below, published within the report, captures the market's prediction for interest rate rises in
the US, UK and Europe, and how they compare with three months earlier, at the time of the May
Inflation Report.

...and how forecasts have been so wrong

This chart, compiled by Capital Economics, shows how the market and the economists have been
consistently wrong on the timing of the first rate rise.
There are many data points but for one example, look along the bottom scale to July 2014 - the
suggestion then was that the rise would come in January 2015.
The line shows the prediction indicated by the "overnight index swap" on money markets.
This poor forecasting has been going on throughout the
financial crisis. Economists have largely failed to grasp
the vast headwinds facing Western economies, and the
UK, and stood by forecasts that a base rate rise was
around the corner.
The harsh reality of Britain's economic situation colossal state and consumer debts and the end of an
economic boom driven by baby boomers who are now
retiring - could mean many more years of low rates
(even if those low rates may be damaging in many other ways). The global situation could also
contribute further deflationary pressure.
In the near-term, there's also a currency war to consider, as we've consistently warned in this roundup. China and Japan have been deliberating depressing the value of their currencies, making their
goods cheaper to sell in Europe and the US. It effectively imports deflation.
http://www.telegraph.co.uk/finance/personalfinance/interest-rates/11032396/Interest-rates-... 9/22/2015