*Click to read the affiliate disclaimer*


(Last Updated On: )

 

If you’ve been following the interest rate predictions for the past year or so, you’ve probably noticed that the projections seem to change more often than airline ticket prices. The general consensus has been that in response to economic recovery and growth after the financial meltdown, the record-breaking, almost ludicrously low interest rates are bound to begin rising sooner or later. It would appear that this is just common sense. But the particulars keep changing: specifically, when will the rates actually start going up and by how much? And how will the rise affect the average citizen?

For a good part of the past year many experts projected a rise in the first quarter of 2016. However, more recent developments have caused those same experts to modify their projections –repeatedly.

 

Hurry up and wait

In early February 2016, rates held yet again and issued more modest growth forecasts, many observers suggested that a raise in interest rates won’t happen until well into 2017.

Yet according to some experts a host of global problems could delay the rate rise until 2020. A forecast by the Economist Intelligence Unit (EIU) pointed to the turmoil in world markets, as well as a seemingly weakening US economy. Analysts at the EIU explained that downward adjustments to the official growth data indicate that the loss of momentum in 2015 was more dramatic than had been previously expected.

The EIU cited the “vulnerability of the recovery, combined with the more decisively dovish tone at the BoE” for the revision of their call on monetary policy. As well, they noted that the BoE is likely to delay policy tightening in 2019, influenced by forecasts that the US will experience a downturn in 2019 and that China’s rising debt will become a greater source of risk.

 

As the Yanks go, so goes the world?

All eyes have been on the US since December 2015, when their Federal Reserve announced the first interest rate hike in years, with projections that additional rises would soon follow. But in the second week of February Janet Yellen, head of the US Federal Reserve, testified before Congress that financial conditions in the US had become “less supportive” of growth. Not surprisingly she cited China’s “unclear” currency policy, which she said was fuelling global stock market volatility.

Ms. Yellen’s remarks prompted experts to speculate that a second rise in US interest rates was likely to be delayed. Brian Jacobson of Wells Fargo Management Association told Reuters, “I think she pushed out the next rate hike. Until there is stability in the price of oil and the value of a dollar, I wouldn’t expect much more action out of the Fed.” And Deutsche Bank economists said that they believed Ms. Yellen’s comments took a March rate hike off the table, whilst retaining the option to raise rates later in the year.

The Feds’ interest rate hike was an attempt to “normalise” the US economy, and most experts agree that fluctuations in US interest rates will at some point have a global effect. But in an increasingly volatile world, “normalisation” is ever more of a challenge.

 

Rates are stable for now – it’s just the projections that are constantly in flux

Though it may be frustrating to continually be bombarded with fluctuating predictions, it really isn’t fair to blame the experts and observers for not being able to make up their minds. Forecasting interest rates in the UK is a tricky business at best, as rates are set and adjusted in response to a wide range of global factors. The Bank of England’s Monetary Policy Committee meets on a monthly basis to set the bank rate, and currently its mandate is twofold: to keep inflation to a 2 percent target, and, even more importantly, to maintain financial stability. Again, in a volatile world maintaining stability is no easy task.

As for trying to determine how individuals will be affected by rate changes (or lack thereof), there is no easy answer there either. Clearly, there are winners and losers no matter how the interest rates go. Lower interest rates benefit homebuyers and borrowers, and higher rates are good news for lenders and savers.

But the truth remains that nobody knows exactly when the rate hikes will happen – not even the experts whose job it is to warn the rest of us. Certainly it’s wise to keep up with the reports, but always take them with a grain of salt. Don’t make any investment or other major financial decision based merely upon what the experts predict; always consult with a qualified adviser before making a choice that could affect your personal finances.

And don’t hold your breath in anticipation – or dread – of a rate hike next week.

Chiino
Latest posts by Chiino (see all)