When Will Interest Rates Rise In The UK?

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Interest rates in the UK have a big impact on people’s day to day lives, if you have a tracker mortgage and the rate rises it will cost you more money in repayments each month. If you have savings and they rise then you will earn more interest each month.

Currently, the feeling is that rates could rise in future, but not dramatically so like we have seen in the past.

The current Interest rate in the UK is 0.75% up from 0.5% the year before.

Read on as we discuss whether interest rates will rise and the factors that could cause this.

Prospects of an Interest Rate Hike

The market is already pricing a near 50% chance that the Bank of England (BOE) will hike interest rates by 25 basis points sometime in the year. The BOE raised interest rates to 0.75% in it’s August 2018 meeting and also increased them in 2017. The central bank raised interest rates only for the second time mid last year as the country continued to struggle with the Brexit uncertainty.

What is a Basis Point ?

Basis points, otherwise known as bps or “bips,” are a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.

Therefore a 25 basis point rise is equal to a 0.25% rise in interest rate.

Here are the recent historic interest rates in the UK:


Some commentators have argued that the Monetary Policy Committee raised interest rates last year, as a way of furnishing themselves with some firepower. Should the UK pull out of the EU without a deal, then the committee would have a leeway of trimming interest rates, to counter any effects arising from the no-deal Brexit.

The BOE to refrain from increasing interest rates at its December meeting concerned by a slowdown in global economy.  The BOE refrained from a rate hike in response to the uncertainty both at home and abroad.  Concerns over the outcome of Brexit talks as well as reports the global economy was not doing well, all but called for a cautious approach.

UK’s Monetary Policy Committee voted to leave the borrowing cost at 0.75% in December amidst concern over the impasse because of Brexit.  According to the committee consumer demand as well as business sentiment, had taken a significant hit as Theresa May continued to struggle to reach a deal with the European Union over the way forward in Brexit negotiations.

In contrast, the US Federal Reserve went against the wind and hiked interest rates for the third time in the year.  The hike plunged the markets into crisis. The stock market took a hit as the hike came at a time of heightened tensions between the U.S and China in what has come to be known as a trade war.

For the UK to carry out even one rate hike in 2019, the economy must keep growing according to BOE chief economist Andy Haldane.  The MPC in its December statement warned that UK growth could slow to 0.2% and could persist into the first quarter of 2019. The economy has suffered a great deal because of the Brexit uncertainty as well as a slowdown in the global economy.

The broader Eurozone also appears to have stalled when it comes to growth, the native currency, the Euro, having lost substantial ground against the majors. Growing trade tensions around the world fuelled by a standoff between the U.S and China continues to fuel concerns around the world given the uncertainties it brings. Businesses are refraining from going forth with new investments as consumers continue to refrain from big-ticket purchases.

Read: Bank of England Governor Mark Carney Offers “Chilling” Warning over Hard Brexit

Brexit Impact On BOE Rate Decision

Changes to interest rates will come down to how the UK responds to political and economic uncertainties. Political uncertainties and proposed departure from the European Union stands in the way of the UK raising interest rates. For a rate hike to occur then, the UK will have to leave the trading block in an orderly manner. Failure to reach an agreement could force the BOE to cut rates.

While the global economic slowdown is a point of concern for policymakers around the world, the MPC is maintaining a watchful eye on Brexit proceedings expected to influence future policy measures. BOE Governor, Mark Carney, has already warned that a disorderly Brexit could have a negative impact on the Sterling that is already under immense pressure.

A no-deal Brexit could also disrupt the economy, something that could lead to slow growth. Such a development could force BOEs hand into tweaking the benchmark interest rate to accommodate any shortfall.  Amidst the slowdown in economic growth, the BOE could be forced into carrying out interest rate hikes as a way of maintaining stable inflation levels especially in the event of a Brexit deal.

The BOE says it is more than ready to take necessary action to shield the economy from the effects of an exit from the EU.

The fact that the country would not be able to produce goods and services without generating inflation is a serious concern. Some observers believe that a no-Brexit deal could force the BOE to consider other unconventional policies in addition to changes to interest rates.

“A no deal might push the MPC into expanding [quantitative easing] or other extraordinary liquidity injection measures,”

Said Ten Parikh, senior economist at the Institute of Directors.

A 25 basis point interest rate hike would only happen on economic data indicating that the economy would cope well with higher rates. The central bank may also have to consider higher interest rates should weakening of the pound persist, leading to a  spike in inflation levels especially in the event of a no-Brexit deal.

Labor Market Stability Impact

A stable labor market continues to support talk of a rate hike in 2019, even as the country continues to grapple with the Brexit crisis. UK’s labor market continues to show signs of improvement, and employment levels have increased by 141,000 in November alone.

The employment rate of people between the age of 16 and 64 is the highest since 1971. Conversely unemployment has dropped to 4% underlining a robust economy that most economists believe will be able to support at least one rate hike in 2019.

“All these points towards a reasonably healthy consumer, albeit with confidence low due to ongoing Brexit related uncertainty, in an economy with limited excess capacity and rising domestic inflationary pressure. For the time being the Bank of England looks to be on hold but were a no-deal Brexit to be taken off the table, the underlying strength of the labour market may justify moderately higher interest rates, if global growth holds up,”

JPMorgan Strategists in a statement.

Inflation Concerns

The BOE has already indicated that at least one or two interest rate hikes would be needed to stabilize the economy as well as inflation levels, should the Brexit standoff proceed smoothly. However, inflation levels dropping below the target rate and concerns over the health of the global economy could thwart plans of a rate hike.

The BOE has a responsibility of Ensuring inflation levels trend close to the 2% mark. Medium-term pressures of supply and demand go a long way in affecting inflation levels that influence BOEs decision when it comes to monetary policies.

Inflation vs Deflation - Guide

Read: Understanding Inflation and Deflation: The Complete Guide

In its November policy report, the BOE estimated inflation levels for the first quarter of the year to stock around the 2.2% mark.  The regulator has since changed its forecast to indicate much lower inflation levels. According to UK economist, Ross Walker, the drop was much faster in January and could come in at 1.8%.

UK inflation levels continue to edge lower in response to lower oil and petrol prices. A push by the government to place energy price caps on households that buy electricity and gas on suppliers default tariffs has also had a hand on a decline in inflation levels.

A fall in inflation levels could put pressure on companies to increase wages, a move that could result in a 3.3% increase in annual wage inflation. In return, this could have a significant impact on the economy. Increased operation costs as a result of higher wages are the last thing that companies want at a time of Brexit uncertainty.

High wage inflation levels come at the worst time as the global economy has started showing signs of weakness compounded by volatile financial markets.  Considering the headwinds at hand, there is a higher chance that central banks around the world could refrain from approving interest rate hikes.

The BOE can only raise interest rates on economic prospects snapping up, supported by inflationary pressure to offset any other indicators falling below target.  In the past, the central bank has raised interest rates on inflation levels falling below the 2% threshold, on low oil prices and a strong sterling. A drop of inflation levels, below the 2% mark, should remove the pressure to raise interest rates for the BOE.


Read: UK Inflation Expectations Hit Half-Decade High: Brexit & Value of the Pound

Brexit Crisis Influence on Rate Hike Decision

For the longest time, policymakers in the UK have voted in unison on interest rates depicted by a recent vote of 9-0.  With the governor insisting that interest rates could move either direction, we could be in for a division in policy stance, as the Brexit crisis deepens.

A three-way split in the way policymakers vote to decide the next course, on interest rates, could be in the offing. For instance, should the UK leave the EU without a deal then policymakers would be hard-pressed to respond.

Fresh barriers to trade with other European nations would be one of the most significant tests on the UK exiting the EU without a deal.  Productivity, as well as investments in the country, would also take a hit. Carney has already warned that contrary to perception, a no Brexit deal could also force the regulator to raise interest rates as one of the measures of countering any repercussions.

In most cases a no Brexit deal could see the Sterling edging lower against the majors, the last thing that policymakers want to see. In response to such a drop, the MPC could be forced to raise interest rates as a way of keeping inflation at the designated 2% level.

In case of a Brexit deal or an indefinite postponement, there could still be a division when it comes to policy action. A good number of officials maintain that a smooth Brexit would call for gradual rate increases. However, there are those that insist on a more cautious approach.

Low-Interest Rate Environment

Even though gradual interest rate hikes could be in the offing going forward, the era of low-interest rates looks set to persist over the next 20 years. Ian McCafferty in a valedictory speech before leaving the MPC believes UK borrowers and savers will have to contend with low-interest rates, below the 5% threshold.

Structural changes to the global economy are some of the reasons why interest rates will continue languishing near all-time lows.  The long-term trend on interest rates correlates with borrowing costs, which MPC uses to keep inflation levels in check. It explains why borrowing costs have remained relatively low than at any time since the BOE came into being in 1694.

However, consumers and businesses should brace themselves for interest rate hikes according to the McCafferty even though they would be limited and gradual.  According to the policy maker, the BOE is not behind schedule when it comes to its tightening policy. However, he expects it to carry out two-point interest rate hikes over the next eighteen months or two years. Brexit uncertainty should continue to make it difficult to pinpoint the exact time when the rate hikes come into being.

McCafferty also expects the BOE to respond to growing concerns that low unemployment levels in decades have a hand on skill shortage in the economy. The fact that skill shortages have spread from skilled occupations to the unskilled sector is a point of concern.  A drop in skilled labour is the last thing that the economy needs.

“The labour market has shown significant signs of tightening in recent months,” McCafferty said. “Surveys and other measures are pointing to labour shortages as a constraint on output growth.”


Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business.His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More.He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased