The Bank of England interest rate has been held at an historically low level of 0.5% since March 2009. The philosophy was that low interest rates would encourage businesses to take advantage of cheap loans in order to expand and so help to grow the UK out of the recession that it was pitched into by the Global Financial Crisis.
By all estimates, the UK economy is now expanding, so it could be argued that the interest rate gambit and quantitative easing measures have worked, whilst most commentators would caution that the recovery is still relatively weak, in classic terms. For this reason, the Bank of England is in no hurry to tighten monetary policy; particularly since inflation is below the Bank’s 2% target. At some stage, interest rates will rise, if only to cool the UK’s property market and avoid a bubble. Forward Guidance from the Bank of England suggests that a hike in the interest rate is unlikely before next spring and it is certain that any rises will be incremental, probably in 0.25% steps or less.
Recently, Charlie Bean, an outgoing deputy governor of the Bank, has been gazing at his crystal ball to try to discern where rates will settle. Mr Bean sits on the Monetary Policy Committee of the Bank, so his prognostications are likely to be more reliable than many a mystic’s. In his opinion, rates could well settle at the 3% mark within a time frame of 3 to 5 years.
Whilst the Bank’s interest rate (the base rate) relate to costs to the banking sector, anybody with a loan, credit card or mortgage will tell you that commercial loans are already well above 0.5%. Inevitably, any increases in base rate will be passed on to customers. At the moment, it is possible to secure a (short term) fixed mortgage rate of 2% for 3 years or 3% for five years.
Mr Bean’s prediction means that those currently enjoying such rates could see their mortgage repayments double in the coming years. One thing is certain: borrowing costs will rise in the foreseeable future.