Thursday, 26 November 2009

C@W UK interest rate predictions


Hope the above chart is useful, click on it to make it larger if you want to see the detail. I have been to several presentations in recent weeks given by respected City economists. This is my effort at amalgamating their interest rates predictions for the next 5 years.
Such long term predictions are very hard to do and always wrong; hence economics being known as the dismal science.
However, if you are looking to invest some money right now or make a borrowing, this will give you some guide as to what to do. For example, keep a floating rate mortgage for another year and then switch to a five-year fix.
What is behind the numbers? Well effectively the consensus is that next year will be poor for sometime, then the real long-term effects of QE will kick in driving a big growth spurt in 2011/2012. The resulting inflation and need to finance the fiscal deficit will create a need to raise rates quite sharply back up to more expected rates.
So if you are a saver, only another year to go, if a borrower only one more year of the head-in-the-sand can be maintained. it will be interesting to look back and see what the outcome is. There could be several external shocks which make the chart a lot more exciting.

17 comments:

Blue Eyes said...

I'll be shocked if rates only go up to 5%.

From a purely selfish point of view I need there to be a few high-LTV, high-multiple mortgage deals available by early 2012. I will no doubt be paying higher rates than now, but if there aren't any deals at all I will be in trouble!

buildingstoat said...

Very interesting. Do you have any views on what will happen to 'retail' interest rates. When bank rate went down, savings rates went down and cost of borrowing to Joe Bloggs went up. Do you expect that spread to continue or narrow?

CityUnslicker said...

BE - 5% is enormous when you think 70% of demand is created by consumers and most of them have a mortgage/rent - 5% is 1000% up from here!

this seems silly, but if you have a tracker on 100k at BOE rate today you are paying £500 pa. at 5% you are paying £5000 and as we know you will have to remortgage above that. Higher rates than this would be suicidal for the economy for the forseeable. Another reason to stop QE and cut the deficit - to stop the need for sharp rises in interest rates.

Welcome Mr Stoat; narrow a little over time, savings rates will increase, but banks will gouge mortgage lending for a long-time yet. LIBOR has come back to more normal levels - the Govt could help by leadind the market with Northen Wreck - but then thery are shareholders in RBS / LLoyds too....

Blue Eyes said...

CU - but as Mr Stoat points out, few people are paying close to 0.5% on their mortgage. Rates were 5.75% not long ago, 15% not much longer ago (as Brown kept telling us). Much higher inflation seems inevitable given QE and the collapsed £. Are you suggesting the Bank will abandon its inflation target?

Demetrius said...

This is the BoE, but what about the real world out there? My instinct, no more than that, is that rates could move up more than expected, sooner than expected.

Bill Quango MP said...

BE: Business borrowing at 1.5 - 4% over base can't operate at those levels unless the economy is on a boom. A very sharp rise to much over 4% will knock out a whole raft of the smaller business.

rwendland said...

If you were in a position to downsize on your home, so have say £100k to invest for 10 years until retirement, would that be a good move now while low interest rates help house selling?

If interest rates go to 5% I suppose we can expect house price falls. But non far-east investments don't seem that certain either and may suffer from inflation, and you lose the utility of a larger house for the 10 years.

Anyone willing to give a view?

Richard Elliot said...

@CU I think your quick illustration of a £100k loan is very telling, a lot of people will feel pain if rates go up 1000% from here.

CityUnslicker said...

@BE - the vast majority of mortgages are trackers - hence the big fall in RPI inflation, almost entirely due to mortgage interest repayment falls. Not everyone is at 0.5%, but may are under 3% and could move to 8%. Same difference.

Edindie said...

@rwendland

If you're getting out and staying out, surely it is better to sell when the market is higher? Inflation means more house price growth than savings growth I'd imagine.

But as always, I'd probably be more concerned with what is convenient.

(P.S. Jam tomorrow is rubbish!)

Blue Eyes said...

I doubt many people who have seen their mortgage rate go from 6% to 3% will be shopping till they drop on the cash-flow difference.

CityUnslicker said...

BE - Mrs CU did just that until we sold.

RWENdland - mad idea from me. Mortgage your house to the hilt at a fixed rate for 10 years - rates will never be lower. The mone inested will earn more than 5% over 10 years as savings rates shoot up.
Plus over 10 years you still get the capital appreciation on the house and the use of the house. The wolrd talks of deleveraged, but money will never be so cheap again as it is now thanks to Qe - so stock up on it if possible.

Anonymous said...

Feeling very smug to be getting 5% now.
Question is will the organisation paying it still be here in five years.

Hmmm

Weekend Yachtsman said...

You don't need to go to City presentations to find out stuff like this.

Just note that Banks and Building Societies are starting to offer fixed-term bonds and savings products with interest rates around the 4% or 5% level, subject to various t's and c's.

They are not doing that to be nice to people, they are doing it because they expect to be able to make money at those sort of rates in the fairly short term.

I suppose as a nett saver I ought to be pleased; but as I am also a pensioner I look back to the great Heath/Wilson inflation and fear for my future. Will my currently-just-about-livable-on pension be enough to pay the newspaper bill in ten years' time? Probably not.

CityUnslicker said...

Wy - ture you can look at forward rates and get a similar conclusion; but nice to have the experts prediction too.

Your wealth will be fine as long as you take active management steps to look after it.

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