Thursday, 14 October 2010
Where to for UK Interest Rates in 2011?
The Bank of England is trapped in the zone of a UK economy experiencing internal deflation and yet importing inflation (from China, commodities) via its trade deficit. A peculiar and hard set of circumstances to judge; so hard that it has not done anything year to date....
This is very much as was predicted by economists last year. However, now they all thought that in Q42010 the recovery would be well underway and interest rates could begin to rise. Instead we find the Bank of England thinking about lowering real rates further by doing more Quantitative Easing.
So are rates going to shoot up next year? The answer to which maybe is will it matter? Already the cost of funding to UK banks is currently only low because they are accessing the UK Special Liquidity Window (i.e. more taxpayer lending, albeit profitable) and the European scheme. As comments to the previous post pointed out, this will end next year and force banks to come to market. This is then going to push up real rates and Libor may again climb 100 or more basis points (1%) over the Bank of England rate. banks are going to have to raise capital to avoid a bigger crunch than this - so this is No time to won bank shares either.
What is unlikely to happen is that rates this time next year are at 0.5%. Last year it was pretty clear that the headwinds were such that rates would stay low; Cityunslicker took out a variable mortgage with a low rate to take advantage of this. Next year the economists may well be proved right, with Bank liquidity needs forcing real rates to rise (in which case the Bank of England will have to follow, or else disband itself as it becomes meaningless - but it won't be sold to the public this way). However, given the weak state of demand in the economy, rates are not going to shoot up to combat external inflation that we can little about and 4 rate rises will be a lot - still then keeping rates under 2%.
Time yet then to wait before fixing a mortgage - less time though to get one as Banks suffer another bout of credit crunching.