Interest rates are currently at a record low of 0.5 per cent; providing a big boost to the economy, especially when it comes to the housing market. Estate agency personnel have continued to see house sales rise over the last few months due to the number of mortgages being taken out increasing – thanks to low borrowing costs.
In order to further encourage this post-recession recovery, the new governor of the Bank of England (BoE), Mark Carney, said at the beginning of August that interest rates will continue to stay low until UK unemployment drops to below seven per cent. It was estimated that this would not happen until 2016.
Is that really the case though, or will interest rates rise before then?
Low rates haven’t been promised
The key thing to remember is that the BoE has not promised low rates until 2016. Its ‘forward guidance’ simply shows that rates will not rise until certain criteria has been met. This means that if unemployment falls to below seven per cent before 2016, interest rates will rise. Factors other than unemployment figures might also affect interest rates, such as rising household incomes.
Essentially, the BoE is waiting until the economy truly recovers before it pushes the base interest rate back up and it’s important to remember that there are a number of things that can signal an economic recovery.
Unemployment continues to fall
The BoE doesn’t expect unemployment to drop to below seven per cent until 2016, meaning interest rates shouldn’t begin to rise until late 2016. However, recent figures have shown that unemployment figures might be falling faster than first expected. The Office for National Statistics (ONS) figures, which were published on the 11th of September, show that unemployment fell from 7.8 per cent to 7.7 per cent between May and July.
Many financiers believe that Mark Carney’s prediction of interest rates staying low until 2016 now seems unlikely, as the jobs market is now recovering much faster than expected. If the job market continues to do better than expected, it’s likely that interest rates could rise way before 2016. In fact, investors recently said that they believe that interest rates will begin to rise in late 2014 or within the first few months of 2015.
It’s important to remember that the BoE only provides the base rate of interest and that businesses (as well as markets) can choose to set whatever interest rates they like – within reason. Some markets have chosen to ignore the BoE’s forward guidance and have already begun pushing up market interest rates, despite the fact that Mark Carney recently gave a speech in Nottingham which reaffirmed the idea that interest rates will stay low until 2016.
Mortgage borrowing rates remain fairly low at the moment, but it is likely that interest rates will rise before 2016 – not only because some markets are choosing to ignore the BoE’s guidance, but because unemployment rates are seeing a fall faster than expected. Either way, the housing market should prepare for how rising interest rates will affect the market.