In a new turn of events, the Bank of England has indicated interest rates will rise far more quickly and at a larger rate than was previously hinted.
If the economy stays on its current track, these new higher interest rates will most likely be brought forward and economists have predicted that this new rate rise will come as early as May.
Who will be affected by the rate rise?
At the latest bank policymakers meeting, it was agreed that interest rates were to remain at 0.5%, however, this has now all changed from the November meeting and it is thought they next rate rise may come in May. It is also predicted that it will be more than previously estimated based on these comments from the Monetary Policy Committee. This higher interest rate can have a huge effect on households and the overall economy as around 8.1 million UK households have a mortgage with almost half on a standard variable rate or a tracker rate. These mortgages are likely to follow suit and will match the Bank of England’s increase in official rates. While this is bad news for those on these types of mortgages, it is great for savers as this rise in rates also normally means a rise in rates of interest. Furthermore, since this announcement from the Bank of England, the value of the pound has jumped around 1% against the euro and the dollar.
Rate rises and the global economy
The Bank of England has noted that the global economy is expanding at the fastest pace in seven years. This has been a major factor in why the interest rates are expected to rise earlier and higher than previously thought as the UK is benefiting from this global growth. Furthermore, it also predicts that UK wage growth will rise, giving another boost to the economy. In just a few months, the previous UK growth forecast made in November has risen from 1.5% to 1.7%.
The problem here is that UK growth forecasts are always changing and different forecasters will all have different predictions. Based on economic growth predictions between 2015 and 2017, city forecasters came out on top over non-city forecasters. Morgan Stanley, in particular, was extremely accurate with their 2016 GDP Growth Rate prediction, averaging at just a 0.15 percentage point off the actual figures. This was compared to the industry average of a 0.47 percentage point. The traders have already placed bets that 2018 will be a low volatility year as many economies are growing simultaneously and earnings forecasts are also strong across the different sectors.
Will Brexit have an effect on interest rates?
These forecasts have all been made on the assumption that Britain’s departure from the European Union will go smoothly, however, there is much uncertainty over this issue, making predictions for GDP growth harder. Traders are recommended to use platforms like ETX Capital when taking advantage of such trading opportunities as they feature risk management tools to help you maintain some caution.
The UK’s economic engine is still restricted by Brexit and this remains the most significant influence on the future of the economy. While the UK was one the fastest growing economies in the G7, it is now the slowest and so where inflation rates will end up is still very much up in the air for the next few years.