Economists predict an interest rate rise in the near future

With the royal wedding and recent record temperatures boosting the UK economy in May, economists predict an interest rate rise in the near future.

The UK economy grew by 0.2% in the three months leading to May, compared with the previous three-month period, the latest figures from the Office for National Statistics (ONS) show.

However, wages rose more slowly over the same period, wage growth, excluding bonuses, slipped to 2.7% from 2.8% in the three months leading to May, whilst unemployment decreased by 12,000 to 1.41 million.

For some, that means we could be in for higher borrowing costs as economists expect interest rates to go up next week. The predictions come as doubt was cast on a possible increase earlier this month. That came after inflation held tight at 2.4 per cent, instead of rising to 2.6 per cent as economists predicted.

It is likely to be relatively small, from 0.5% to 0.75%, and for the large majority of homeowners, not particularly painful, however, it would be the highest it has been since March 2009, when it was reduced from one per cent to 0.5 per cent during the financial crisis.

Like in all situations, there will be both winners and losers. The winners could include 45 million savers, who have seen some interest rate improvements after the previous rise in November. But at least four million households with variable or tracker rate mortgages are likely to see their payments increase once again.

Variable-rate mortgages
Throughout the UK, roughly 9.1 million households have a mortgage. About half of these are on a standard variable rate or a tracker rate, amounting to between four and five million households.
These are the people who would be most affected by a rate rise, as their monthly payments would increase.
According to the Nationwide, a 0.25% rate rise means someone on a £200,000 mortgage would face paying around an extra £25 a month, or about £300 a year.

Fixed-rate mortgages
The large majority of new mortgage loans (96%) are on fixed interest rates of two or five years. Currently half of all outstanding loans are on fixed rates, equating to about 4.5 million households.

Such rates have already started to rise since November’s rate increase.
When borrowers reach the end of their term, they may find they have to make higher monthly payments or be required to move lender to keep the mortgage affordable.
That said, they could, depending on when they took out their loan, end up on a cheaper deal. The lenders offering fixed rates tend to be especially competitive.

A recent survey of nine economists by website Finder concluded all of them predict a base rate rise, mostly because they believe the economy has strengthened, inflation is set to go up and so are wages, despite having stagnated so far.

But while there seems to be agreement over an improvement of the economy up to now and positive expectations about wages in the coming months, some economists were concerned about housing affordability and the rise in the cost of living.

Andrew Wishart of Capital Economics said: ‘The Monetary Policy Committee held off raising rates in May because it wanted to see evidence that the weak patch in economic activity at the start of the year was just a blip. ‘The official data and business surveys released since then suggests that growth did indeed recover in Q2. ‘With little slack left in the labour market, robust growth is likely to lead to a further increase in wage inflation. ‘Alongside the MPC’s ambition to return interest rates to a level from which they can be cut to help in the next downturn, we think that provides reason enough for the MPC to raise interest rates in August.’

Share this story

Written by Michael Fyffe