The Bank of England finally raised the base rate by 0.25% in November 2017, the first rise for more than a decade, but when should consumers expect the next increase to happen?
This was the first time the central bank had raised the base rate since July 2007, and governor Mark Carney says he expects two further rises to follow in the next three years.
The central bank may have to make its next move soon if the rate of inflation continues to stay well above its official 2% target. Data published by the Office for National Statistics (ONS) shows that the consumer prices index (CPI) rate of inflation rose to 3.1% in the year to November, the highest level seen for five years.
Other economic uncertainties remain. The success, or perceived success, of the UK’s negotiations to leave the European Union will have an impact on when rates rise again. Also, while the pound has performed better against other currencies in recent months, it is yet to return to the levels seen before June 2016’s Brexit vote.
Ben Seager-Scott, chief investment strategist at Tilney, says he expects to see a further 0.25% base rate increase in the next year.
“Markets are pricing in one more rate hike for the UK in 2018, and that doesn’t seem unreasonable to me, and is very much in line with the broader themes we’ve seen recently,” he says.
“I expect the governor to continue to look through the headline inflation and focus more on the underlying economic fundamentals where we are seeing sustained growth, even if the outlook is weaker than most developed market peers.”
Sarah Coles, personal finance specialist at investment firm Hargreaves Lansdown, says markets expect the next increase to come in August 2018.
“Mark Carney’s current view is that we can expect a further two rises over the next three years,” she says. “He hasn’t elaborated on this, but balance of probabilities being priced into the market at the moment is that by the August meeting of the Bank of England in 2018, it’s more likely than not we will have seen the first of the rate rises - but even then only by 0.25%.”
Playing the waiting game
November’s rate rise provided an immediate boost to many cash savers, although some providers have failed to pass on the full 0.25% increase to their customers.
Paul Richards, chairman of adviser firm Insignis Cash Solutions, believes increasing rates at the government-backed National Savings & Investments (NS&I) will soon force other providers to act.
“The government’s move to extend the rise to NS&I savers puts more pressure on competitors to do the same, but savers have still only seen the full benefit with a handful of banks. Most banks are still waiting to see what competitors do, or passing on only a fraction of the rise.”
He believes there could be two rate rises in 2018, if economic conditions allow, although banks will still be reluctant to pass on any increases to savers in full. Instead they are playing a “waiting game”.
“Some point to two further interest rate rises in 2018, but protracted Brexit negotiations could delay this,” he argues. “If the Bank of England hikes rates again, it will once more be the government’s decision on NS&I rates that influences whether other banks will follow.
“No savings provider wants to pay more interest than they need to, as it has a direct impact on their profitability. Challenger banks are hungry to grow their balance sheets via retail deposits, so we’ll likely continue to see better rates from these players than the traditional larger banks.”
Mr Richards says the end of the Bank of England’s term funding scheme – which was established to support banks’ lending to consumers – will also increase competitiveness in the savings market.
“February 2018 will see the end of the £100 billion term funding scheme, a source of cheap borrowing for banks,” he says.
“Once this scheme is closed, appetite for retail deposits will increase, prompting more competitive rates in the market. Longer term the impact will be even more significant, banks have four years to repay money to the scheme, and will need to rely on retail deposits for some of these funds.”
However, Mrs Coles urges savers not to leave cash languishing in low-paying accounts in the meantime. She is also urging borrowers to lock in to good mortgage deals while rates remain low.
Major mortgage lenders such as Barclays, Halifax, Lloyds Bank, and Santander passed on the full 0.25% base rate rise to borrowers on 1 December 2017, but market rates remain below historic levels.
“Gradual base rate rises will hopefully enable borrowers to gradually adapt to the higher costs of borrowing, so future increases won’t come as a nasty surprise,” she says. “Locking into a long-term fixed rate mortgage will provide security here.”