Bank of England chief hints at January rate rise
Mortgage and savings rates could start to rise in early 2016, the Bank of England governor has hinted. As part of his remit to control inflation, Mark Carney said interest rates could start to rise from "the turn of the year".
In a speech at Lincoln Cathedral, the governor said: "The Monetary Policy Committee's intention is to return inflation to target in a sustainable manner within two years. That means setting Bank Rate to eliminate the remaining slack in the economy, bringing about the sustained increase in costs necessary to achieve overall inflation of 2%.
"I expect that this will involve raising Bank Rate over the next three years from its current all-time low of 0.5%."
However, homeowners fearing drastic increases in the mortgage costs may be reassured that the governor has said he expects increases in the base rate "to be gradual, and limited to a level below past averages".
With the Bank's historic average short-term interest rate 4.5%, the governor said he expected the base rate to rise to about half that – 2.25% – over the next three years.
The Bank is closely monitoring the effect of rate rises on homeowners and Carney said that, based on current market expectations of where the base rate will be over the next few years, over a half of UK mortgage holders will pay higher rates in a year's time, and close to three-quarters of them in two years' time.
Carney said the Bank's decision-making about interest rate changes will, as ever, be based on detailed economic analysis and will be responsive to any ‘shocks' or developments that the UK economy will have to weather. "The path is much more important than the precise timing of the first rate increase," he said.
Could the rate rise this year?
Howard Archer, chief UK and European economist at IHS Global Insight, has said that a rate rise could come before the end of the year. "For the time being, we are maintaining the view that the Bank of England will lift interest rates from 0.50% to 0.75% in February 2016, but we have become markedly less confident in this call and there is clearly now a very real possibility that the MPC could act before the end of 2015, most likely in November."
He explained: "An interest rate hike before the end of 2015 will become ever more likely if earnings growth picks up further over the coming months and the economy maintains healthy growth."
Regardless of whether the Bank of England ups the base rate in late-2015 or early-2016, Archer said IHS Global Insight sees interest rates "only rising to 1.25% by the end of 2016 and 2% by the end of 2017".
Earlier this week, the CPI measure of inflation fell to 0%, from 0.1% the previous month.
“Those people who do think they might struggle if rates rise need to start preparing now to weather the changes. Putting aside a little extra each month will help act as a buffer so that any rise in the cost of borrowing can be mitigated.”
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.