Where UK Is Heading In Terms Of Interest Rates?

  • Jan 16, 2019 GMT
  • Team Kalkine
Where UK Is Heading In Terms Of Interest Rates?

In August 2018 MPC’s (Monetary policy committee) meeting, Bank of England raised its interest rate from 0.5% to 0.75%. This was the highest interest rate in a decade and market has been speculating for further rise in interest rate by the end of 2019. The recent rise in interest rate shows trend for mortgage rate is in upward direction. Bank of England is thus keeping a watch on the economic statistical data and this will help the bank to decide on interest rate hikes while tumultuous Brexit scenario can pull the strings either way.

How is the base rate established?

The calculation for base rate by Bank of England has been modified in recent years. When Mark Carney took oath as the Governor of Bank of England, he released a new forward guidance on when BOE will be hawkish or dovish on base rates.

Mr. Carney created a notional relation between the interest rate and UK unemployment rate. He earlier mentioned that the base rates will not rise until UK unemployment fell below 7 percent. But unexpectedly the threshold line was hit, so ditching the unemployment trigger and replacing the same with new economic indicators. Naturally, when interest rates rise or fall mortgage rate starts following the trend. Now below is a snippet of the chronology in this regard.

  • Interest rate was thought to go up in 2015, but that did not see the light of the day as inflation witnessed a challenging era. In fact, for an economy to grow healthy, BOE’s target inflation hovered around 2%, and further rate hike could send inflation lower; thus the BOE kept rate unchanged.
  • In 2016, Mark said that UK economy was not strong enough for a rate hike, so again left rates unchanged.
  • After Brexit decided to leave EU, there was a chance of an economic plunge. So, concerned Bank of England decided to cut interest rates from 0.5% to 0.25% to try to boost the market sentiment.
  • After Brexit vote, pound started plunging and impacting inflation. Naturally, this was another triggering event.
  • Bank of England enhanced the base rates in November 2017, first time in a decade, and the levels were back to 0.5%.
  • In April 2018, two of nine members of MPC committee voted in favour of hike in interest rate, but the majority voted to keep it unchanged.
  • May 2018 put forth a challenging scenario with anticipations of a disordered Brexit
  • But what was surprising that in June, three of nine members voted for hike in base rates, meaning one more member voted for a rate hike. This surprised the investors and the market as well.
  • BOE raised the rates to 0.75% in August 2018 and this was high looking at the prevailing trends.
  • In November 2018, BoE considered that depending upon the kind of Brexit deal, interest rates could further rise.
  • In December 2018, members voted unanimously to hold the interest rate, saying that tumultuous Brexit uncertainty had intensified over a month, meanwhile inflation is expected to ease below 2% target while Crude and WTI oil prices were also a bit volatile.

Consensus Forecast for interest rate

Many experts have forecasted the base rates to be up by about two times by year 2020 while a figure of 1.25% has been estimated by 2021. However, there are many loopholes attached to the scenario.

Indicators to watch closely

  1. The shrinking inflation
  2. Market support on rate increase
  3. Uneven growth of Economy
  4. Unemployment rate that looks a bit narrowing

 

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

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