Bank Rate, at 0.5pc for more than six years, looks set to remain fixed until well into 2019, according to the financial markets. It could be far longer, as we explain below.
Take a look at our Bank of England channel for in-depth coverage of the Bank's latest views on the economy. Below we boil it down to the predictions and explain what it all means for savings and mortgages.
This guide is updated as events change: Follow rate alerts on Twitter
What are the latest rate predictions?
The prediction had been for a rise in December 2016 or January 2017 for the UK Bank Rate, following the first rate rise in the US for nine years, in December. But fresh global economic gloom in 2016 and the comments of the Monetary Policy Committee (January 14) shifted opinion. Now money markets imply that the first increase will come in August 2019, following dramatic movements in the market in the past few weeks.
A year ago, a rate rise was considered likely by the end of 2015. Now markets are pricing in a 50pc chance of a rate CUT this year.
Why the big change in rate predictions?
Since the hawkish stance of last summer, much has happened to convince markets that rate rises will be further off than anticipated. These events include:
• the recent stock market turbulence, caused by China;
• weaker UK economic growth;
• the return of UK deflation in September (although inflation returned to 0.2pc in December);
• More dovish comments from the Bank of England (4 Feb).
It is the last of these that has sent the "first rise" forceast move far into the distance. The Bank of England Inflation Report on 4 Feb, on so-called Super Thursday, boosted the case for the "doves" and markets pushed the forecast for the first rise further back. The falling oil price (below $28), and worsening global economic outlook, have contributed further in early 2016. This was all compounded be fresh concerns for banks in early February.
This trend for pushing the forecast for the first rise further into the future has been in place since rates were cut in 2009. The chart below shows how it has played out in the last year; the prediction for the first rate rise keeps getting pushed back. At one point in July, markets believed a rise would happen around now.
Market expectation for the first rise in Bank Rate
Analyst views
Commentators rashly suggeted at the start of the year that a rate rise would happen soon, following the US rate rise decision in December.
At the start of the year, Samuel Tombs of Pantheon Macroeconomics forecast the first rise in May. Last week, it still said it expected two rate rises in, after the Brexit vote.
Capital Economics said: "Over the past few weeks, markets appear to have pushed back their expectation for the timing of the first hike in UK interest rates all the way to Q3 2019, and there has been some speculation of a rate cut in the near term. This stands in contrast with the latest economic indicators, such as January’s Markit/CIPS PMI which suggested that the recovery regained some momentum at the start of the year. And although February’s MPC Minutes and Inflation Report were fairly dovish on the whole, the MPC’s forecasts still showed inflation overshooting the 2pc target at the two-year forecast horizon.
"In fact, the further downward shift in market expectations over the past week has left them broadly in line with the 'constant 0.5% Bank Rate' forecast, which showed inflation hitting 2.5pc by the end of the (3-year) forecast period. We admit that a near-term rate hike looks very unlikely, but we still think that the first hike will come in November this year, much sooner than markets expect.
In January, Capital Economics had been expecting two rate rises in 2016.
It should be noted that Bank of England chief economist Andy Haldane, arch "dove" of the Monetary Policy Committee, said last year that the case for UK raising interest rates was "some way from being made" and that negative rates may still be needed.
How quickly will rates rise?
Even after the first rise, the market is pricing in only very slow increases, far slower than seen in previous cycles of rising rates. A return to 3pc is not expected until 2025.
The Bank of England's quarterly Inflation Report (Feb 4) captured market predictions, suggesting a notional rate of 1.1pc by the start of 2019. In the last report, in November, the market expected 1.1pc at the end of 2016, 1.7pc by the end of 2017 and 2.3pc by the end of 2018.
...and how forecasts have been so wrong
This chart, compiled by Capital Economics last year, shows how the market was wrong throughout 2014 on the timing of the first rate rise.
There are many data points but for one example, look along the bottom scale to July 2014 - the suggestion then was that the rise would come in January 2015.
The line shows the prediction indicated by the "overnight index swap" on money markets.
This chart, from the Bank of England, shows the market prediction from 2013:
This poor forecasting has been going on throughout the financial crisis. Economists have largely failed to grasp the vast headwinds facing Western economies and the UK, and stood by forecasts that a base rate rise was around the corner.
The harsh reality of Britain's economic situation - colossal state and consumer debts and the end of an economic expansion driven by baby boomers who are now retiring - could mean many more years of low rates (even if those low rates may be damaging in other ways). The global situation could also contribute further deflationary pressure.
In the near term there's also a currency war to consider, as we've consistently warned in this round-up. China and Japan have been deliberating depressing the value of their currencies, making their goods cheaper to sell in Europe and the US. It effectively exports deflation. Expect more of the same and for others to join in.
- Economics explainer: what will a rise in interest rates mean?
So no rush to fix that mortgage?
Possibly, but it's never wise to try to call future rates accurately (as economists should tell you). The cost of fixed-rate mortgages remains historically low compared with "trackers", especially on longer-term loans, making it a simple choice: protection from rate rises at little extra premium. Industry figures show that more than 90pc of those buying and remortgaging are choosing fixed rates. See the latest best buy mortgages here and try the interest rate rise calculator here.
The price of fixed-rate mortgages could be about to fall, however. This is because "swap rates", the rates at which lenders "buy" money for fixed periods on money markets, which rose sharply in December, have plummeted in the first three weeks of 2016. This is because of a gloomier outlook for the world economy and the UK economy, meaning rate rises are less likely than a month ago.
Two-year swaps, which heavily influence the pricing of two-year fixed-rate mortgages, have fallen from 1.1pc on New Year's Day to a four-year low of 0.69pc on February 11.
Five-year swaps have fallen from 1.6pc to 0.86pc in just six weeks, an all-time low. It had been as high as 1.81pc last June.
These swings are so large, it seems inevitable that an influx of new, lower fixed-rate mortgage deals will arrive on the market in coming weeks.
And savings?
That's a more difficult decision. The best variable-rate savings account (non-Isa) pays 1.65pc (Renault's RCI Bank) and the best two-year fixed savings rate is also from RCI at 2.25pc (lower than the 2.33pc best-buy available a year ago). Whether you fix or go with a variable rate it is a gamble, but 2.45pc may feel like a good rate if the Bank Rate still hasn't risen by the end of 2016, which is likely, or even by late-2017, which is very possible.
And as with mortgages, the best buy fixed rates will probably fall or be withdrawn in coming weeks.
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