Interest rates predicted to rise in early 2020s

On 2 August 2018, the Bank Of England raised interest rates from 0.5 per cent to 0.75 per cent. The previous base rate rise was in November 2017, from 0.25 per cent to 0.5 per cent, which was the first raise for more than a decade.

Mark Carney, governor of the Bank of England, said in August 2018 there would be further “gradual and limited” rate rises in the future.

In March 2018, the UK Office for Budget Responsibility (OBR) foresaw interest rates rising slowly through 2018 and into 2019.

Interest rate/Bank of England rate forecast 2018-23*

Source: UK Office for Budget Responsibility, 27 March 2018

In its Economic and fiscal outlook from March 2018 the OBR said: “Since our November [2017] forecast, average mortgage rates are little changed. Our forecast shows mortgage rates rising gradually from the first quarter of 2018, reflecting increases in Bank Rate partly offset by falling margins. Although bank funding costs have fallen somewhat since November, this effect is outweighed by the higher profile for Bank Rate, so that we now expect a marginally higher path for mortgage rates. By the first quarter of 2023, we expect the effective mortgage rate to reach 3.0 per cent, above the 2.6 per cent forecast in November. It stood at 6.0 per cent in the final quarter of 2007, before the crisis.”

The mortgage market view
In September 2018, Mortgage Strategy canvassed the opinion of those in the mortgage market as to the future of interest rate rises.

Ed Stansfield, chief property economist, Capital Economics, said: “Rates could well be raised by another 0.25 per cent in October or November [2018] if the economic data continues to strengthen, but it seems more likely that the Monetary Policy Committee will wait until the outcome of the Brexit negotiations is a little clearer before it raises rates again – probably by another 0.25 per cent in May 2019.”

Robert Sinclair, chief executive, Association of Mortgage Intermediaries, said: “I believe the only reason the BoE has increased the interest rate [in August 2018] is so it has the capacity to cut it again next March if we do not see a smooth transition out of Europe. If we do experience a relatively smooth transition, I would expect the base rate to be one per cent in 12 months’ time and stay there, with the possibility of an increase in either November or March.”

Richard Pike, sales and marketing director, Phoebus Software Ltd, said: “If the economy stays on the same slow but steady growth path, it is likely there may be a rate rise within the next year, but with Brexit just around the corner and the prospect of there being no deal, it really is too uncertain to call. If we end up with no deal and the economy takes a nose dive, rates are just as likely to fall again as they are to rise.”

Ray Boulger, senior mortgage technical manager, John Charcol, said: “With the uncertainty Brexit creates and no indication that the very low unemployment rate is resulting in excessive wage inflation, combined with the risk that President Trump’s trade war will damage the world economy, I think the odds are that the next increase in the base rate is at least a year away.”

Andrew Gall, chief economist, Building Societies Association, said: “The general market view is that the base rate will rise to around 1.1 per cent over the next three years, so interest rates will still remain low relative to their historic averages.”

Sophie Hockenhull, finance expert, Moneyfacts.co.uk, said: “It is difficult to predict how much the mortgage rates will increase in the next 12 months; however, we expect to see a base rate increase every year by at least a quarter point for the foreseeable future.”

Read more on historical interest rates in the UK, 1979-2017.

This article was last updated on 11 September 2018.