This article is continually updated to bring you the latest analysis on when interest rates are likely to rise. You can now enter your email address here to receive updates to your inbox.
At the bottom of this article I also tell you how to quickly calculate the impact of an interest rate rise on your own monthly mortgage payments. Plus I explain why you should consider remortgaging before a new EU rule comes into effect later this year and what you need to do now.
If you are wondering whether you should fix your mortgage rate, but don't know a mortgage adviser whose opinion you trust, then we've partnered up with an award winning mortgage advisory firm to provide fee-free expert mortgage advice for everyone. The service, which I've personally vetted, compares thousands of mortgages here* and you also can see the current best-buy mortgage deals as well.
When will interest rates go up?
In summary: in recent months the market consensus of when the Bank of England's first interest rate rise will occur has dramatically shifted. At the start of 2015 the consensus had been for the first rate rise to occur in the second half of 2015 but weak economic data and falling prices (negative inflation) pushed this back. The market began pricing in the first interest rate rise to occur in the first half of 2016. However, new concerns over the slowing global economy, caused by China, now mean that the market currently predicts the first UK interest rate rise will not occur until the beginning of 2017! See bullet points below for more detail. Also enter your email address here to receive interest rate updates to your inbox.
How the Bank of England base rate is set
The forecasting of the Bank of England base rate has been transformed in recent years. First of all Mark Carney, the Governor of the Bank of England (BOE), issued new 'forward guidance' on when the Bank of England will raise interest rates.
This was a policy which he employed during his previous role in Canada's Central Bank to try and control the market's expectations of when interest rates will rise. The reason for doing this is that an expectation of a rate rise is as important as the actual rate rise itself. If a market thinks that the BOE will increase rates then the cost of borrowing throughout the economy will rise. This can prove damaging for a stuttering economic recovery, meanwhile artificially low interest rates also make cash deposits unattractive, which in turn boosts consumer and corporate spending.
Mark Carney originally created a notional link between the UK unemployment rate and the BOE base rate. In a pledge to keep rates lower for longer Mark Carney said that rates would not rise until UK unemployment fell below 7%. But this threshold was hit, somewhat unexpectedly, so Mark Carney had to ditch the unemployment trigger when it looked like a breach was imminent, instead replacing it with 18 economic indicators.
Then in August 2015 there was a change to the way the Bank of England communicated its view on when interest rates will go up. Historically, on the first Thursday of every month the Bank of England announced its decision on the base rate. However, it did not release the meeting minutes until two weeks later. It is these minutes that investment markets scrutinise for any hints of when rates might go up in the future. For example, they would see how many of the 9 person committee voted for interest rates to go up. However from August 2015 both the interest rate decision and the minutes are released on the same day (dubbed Super Thursday by the press). This means that there is now even greater transparency from the Bank of England surrounding their interest rate decision. So the upshot is that if you are at all concerned about when interest rates will rise you need to keep an eye on the news on the first Thursday of each month.
When does the market think mortgage rates will rise?
Mark Carney has moved the goal posts numerous times on when interest rates will likely go up. Of course, when interest rates rise so will mortgage rates. Below is a short plotted history of the latest views:
Throughout 2014 Mark Carney kept the markets guessing over when interest rates were likely to go up again. After much speculation that interest rates would go up in 2015 this now seems incredibly unlikely because inflation has turned negative once again and is not expected to head back to its 2% target until 2017.
Yet Mark Carney is keeping the market guessing as to what the Bank of England's next move will be. In February he suggested that the BOE could start printing money again or cutting interest rates further if inflation does not pick up soon! The market wasn't expecting that at all and since then inflation has kept falling. Mark Carney has had to write to the Chancellor, George Osborne, in each of the last 12 months to explain why inflation is below 2%. It was in the first of these letters that Carney suggested that the boost to the economy that the low oil price will give could mean he will have to increase interest rates again sooner than the market thinks. Then on 14th July 2015 he announced that the date of the first rate rise was drawing nearer. Yet this rhetoric has since softened giving the impression that there is now no rush to raise interest rates. It would seem that Mark Carney doesn't know his own mind at times. Unsurprisingly the market is taking each new piece of rhetoric with a pinch of salt, as should you.
As mentioned earlier, on the first 'Super Thursday' (which was 6th August 2015 when the latest rate decision, MPC minutes and inflation report were all released at once) 1 member of the MPC committee voted for an interest rate rise. As the vote is a majority vote interest rates remain at 0.5%. But it is the first time since December 2014 that any member has voted for an interest rate rise. The same 8-1 split remained this month. So clearly the date of the first interest rate rise is drawing a bit closer.
At the start of 2015 the market had priced in that interest rates would go up in the second half of the year at the very earliest, but the second quarter of 2016 had been looking much more likely based on the BOE's last Inflation Report, Mark Carney's comments and the recent MPC minutes...
However, a new factor has entered the equation of when interest rates will go up. In August 2015 concerns about the true state of China's economy caused global stock markets to crash. The concern is that if the world's second biggest economy starts to struggle then the knock on effect for economic growth globally, including the UK, could be significant. Putting interest rates up if the UK economy starts to struggle could be disastrous. It is now expected that the first interest rate rise will occur at the beginning of 2017 to 0.75% followed by further 0.25% increases at regular intervals.
Either way, Mark Carney keeps reiterating that when rates do rise it will be gradual and, in the medium term, materially below the 5% level set on average by the BOE historically.
So the current forecast of when interest rates will go up is: Markets are now pricing in the first rate rise (to 0.75%) to occur, not in the second half of 2016 as it had been predicting recently, but now at the start of 2017. Interest rates will therefore remain below 2% in 2017 and 2018. They predict that interest rates will most likely be around 1.5% at the start of 2018 and 2.5% in 2025.
The indicators to watch that will determine when interest rates go up
Whilst the BOE is now claiming that not just one economic indicator will be used in any 'forward guidance' of when rates will rise, a range of them will still determine when they actually do put them up. So economic indicators are still important in judging when interest and mortgage rates are likely to rise. Below is a roundup of the most important indicators to keep an eye on which will influence when interest rates go up:
So what might influence when rates rise, despite the change in the BOEs 'forward guidance'?
Inflation is negative once again – in April the official measure of UK inflation fell to -0.1% (the lowest level since 1960). Inflation then drifted up to 0.1% before dropping back to -0.1% where it is now. That means that the cost of living is less than this time last year. Inflation has tumbled in recent months, the biggest reason being the fall in the price of oil as well as heavy discounting in the shops. The trouble is that inflation doesn't look like spiking any time soon either. Mark Carney has admitted as much in his recent inflation report. In fact, Mark Carney correctly predicted that inflation would fall to below 0%. Don't forget that the Bank of England's target inflation rate is 2% (with anything above 3% or below 1% getting a slapped wrist from the Chancellor). To combat inflation interest rates would be increased but the prospect of low inflation for the foreseeable future has fuelled speculation that the first interest rate rise will now not occur until 2017.
Official support for a rate rise is gaining traction – between August and December 2014 the Bank of England’s Monetary Policy Committee (MPC), who are the people who decide the UK base rate, were not unanimous in their support for holding interest rates at 0.5%. In fact, 2 out of the 9 committee members consistently voted for an interest rate rise. However between January 2015 and July 2015 MPC minutes showed the voting once again became unanimous (9-0) for holding rates. This resulted in the market predicting that the first rate rise would not occur until late 2016. In August 2015 one MPC committee member broke rank again and began calling for a rate rise. This was somewhat expected as Mark Carney had been dropping hints that it might happen. But what was surprising was that only 1 member voted for a rate rise as markets had expected more members to vote for a rise. But as mentioned above, this is not the first time that the MPC voting hasn't been unanimous and they could still change course.
The UK economy has rebounded – UK economic growth had been faltering but the latest figures from the Office of National Statistics confirmed that the UK economy grew by 0.7% in the second quarter of 2015. That means that UK economic growth is back at its pre-crisis level. Yet a growing economy still increases the prospect of a rate rise. In recent months Mark Carney had publicly stated that the low oil price could in fact see economic growth rates soar and force an early rate rise, which was met with much derision.
There's suddenly less optimism about future economic growth - be it the UK services, manufacturing or construction, official data had pointed to improved signs of economic recovery. Yet the services sector which accounts for about 75% of the economy had been driving all of the the recent upturn in economic growth, with the construction sector being flat over the second quarter and the manufacturing sector contracting. This lopsided growth could undermine future growth prospects. The theory would be that if the economic recovery strengthened then interest rates will rise sooner and faster than suggested by the official guidance. But in August 2015 concerns that China's economic growth rate is slowing caused panic. Stock markets fell and economists rushed to factor in the impact of the world's second largest economy slowing on developed world economies. The upshot is that growth rate forecasts everywhere are being downgraded. It's because of this belief that the knock on effect for the UK will be slower growth that forecasts of when interest rates will rise have been pushed back to the start of 2017.
Unemployment is falling – The number of people out of work fell by 79,000 to 1.77 million in the three months to August. This is good news as the previous month the unemployment figure unexpectedly went up. This had been a bit of a shock as unemployment had been falling steadily over the last 2 years. The UK unemployment rate now sits at 5.4%, well below the BOE's old 'forward guidance' threshold, a threshold the BOE hadn't expected to be breached until 2016. Interestingly wage growth continues its new trend of comfortably exceeding inflation - a trend we last saw back in 2009. In fact the growth in average earnings is now 2.8% which is comfortably above the current rate of inflation. A lack of wage growth is a sign of slack in the economy which would make an early rate rise less likely. But if wage growth continues to improve then calls for an interest rate rise will increase.
UK economic growth forecasts are being tempered – while there had been optimism for UK economic growth the previous bullish forecasts have been repeatedly downgraded. The Bank of England now expects the UK economy to grow by 2.4% in 2015, which is slightly lower than the 2.5% forecast in March and well below the 2.9% forecast back in February. The Confederation of British Industry has also downgraded its forecasts, predicting economic growth of 2.4% for the UK in 2015. Interest rates are unlikely to raised until economic growth is more stable.
The new EU rule that could soon stop you remortgaging
The ability to remortgage and/or fix your mortgage became a bit more difficult last year as the rules surrounding the affordability tests when applying for a mortgage were tightened slightly. Lenders had to make sure borrowers could still afford to pay the mortgage if interest rates went up. However, if you were simply remortgaging lenders didn't have to apply the more stringent affordability tests. Some lenders did just that which made remortgaging a bit easier. But new EU rules taking effect later in this year will remove this option for lenders which could end up leaving some borrowers stranded on their existing deals.
If you are planning on fixing your mortgage rate when interest rates start going up the new EU rules may prevent you - leaving you stranded on your existing deal with your mortgage repayments rising in line with the bank base rate or your lender's whim.
If you are on your lender's standard variable rate then I strongly suggest you do the following exercise which will takes you a few seconds but could prevent your mortgage repayments crippling your finances in the near future.
Step 1 - Use this interest rate rise / fall calculator to calculate the impact on your monthly mortgage payments
Quickly calculate the impact of an interest rate rise on your mortgage payments in pounds and pence by using this interest rate rise calculator*. Just make sure you enter the original details of your mortgage, such as the original amount you borrowed and the original term. This will ensure that the starting monthly mortgage payment matches yours. Then simply enter different interest rate rises and you will see how your monthly mortgage payments will change.
So let's say for example that back in 2007 I borrowed £200,000 for 30 years at a rate of 5%, which has since dropped to 2.5% (the lender's standard variable rate). In the calculator I would enter the original loan amount (£200,000 on a repayment basis), the original term (30 years) and the current rate of interest (2.5%). The Bank of England base rate is currently 0.5%. So let's say I want to see the impact if the base rate increased by 4.5% (to 5% - which is the historic long term average) I just enter 4.5% into the 'anticipated rate change' box and click calculate.
The result shown below the interest rate rise calculator tells you that my current mortgage repayment would increase from £790 a month to £1,331 a month. That's an extra £541 a month that I'd need to find!
Once you have the result move on to step 2 below.
Step 2 - The best way to find out your mortgage options
Consumers are unaware of the impending EU rules and the fact it will leave some stranded on their current deals. At best their mortgage repayments will increase in line with the Bank of England base rate, at worst at the whim of their lender.
Most consumers will wrongly assume that using a price comparison site is the best thing to do when looking to remortgage. However, bear in mind
many mortgage deals are only available via mortgage advisers so don't appear on price comparison sites
not everyone can get the rates quoted on price comparison sites
price comparison sites don't take into account your credit rating or personal circumstances which will determine whether a lender will actually lend to you. For example you may not be eligible for the deals quoted by comparison sites and won't find out until they credit check you. That in itself will then hinder future mortgage applications
That is why you are almost always better off dealing with an independent mortgage adviser rather than going it alone. Which is why 70% of borrowers now use a mortgage adviser to find the best deal from a lender who will actually lend to them.
We therefore recommend that you book a FREE callback from this award winning mortgage broker* before you do anything else. There is no obligation on your part and I've personally vetted them. Simply click on the link, enter your name and number and they will take the hassle out of searching the market and make a recommendation, even if it is to stick with your current deal. Alternatively you can call them for FREE for an informal chat on 0800 073 2325.
If you already have an independent mortgage broker that you trust then I suggest you get in touch with them ASAP. There has never been a better time to remortgage.
Further reading - should you fix your mortgage rate now
'Should you fix your mortgage rate now?'
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