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Interest Rate Hike Deferred Again

Interest Rate Hike Deferred Again

22/02/2016

The Bank of England’s committee of rate-setters has voted unanimously to maintain the current interest rate of 0.5pc. The Monetary Policy Committee said it believed rates would go up at least once in the next two years, and it will need to increase at this rate to ensure inflation returns to the target level or 2pc. Inflation is likely to stay below 1pc until the end of the 2016. See a full inflation report made available by the Bank of England here.

What are the forecasts?

The MPC adjusted its forecasts for economic growth in 2016 and 2017 downwards:
  • Predicted growth 2016: 2.5pc
  • Adjusted growth 2016: 2.2pc
  • Predicted growth 2017: 2.7pc
  • Adjusted growth 2017: 2.4pc
The MPC is hopeful that upward pressure on wages will increase in 2016. It believes the spare capacity in the economy will be used up this year. In essence, this means the UK economy will be able to increase its output of goods and services. When this happens, pressure on labour costs will also rise. In other words, if the health of the economy improves at a sufficient rate, wages, and subsequently inflation, will go up. The MPC has calculated its projections based on global economic events such as the significant fall in oil prices.

What does this mean for the property industry?

If rates stay low, so will mortgage repayments, wages, and interest on savings. Therefore, as long as the 0.5pc rate we have become used to continues in the coming year, people will still continue to struggle to save up for house deposits – this is also independent of housing supply.pound coins_money_increase_interest_free However, the forecasts by the MPC and the Bank of England propose that change is coming, perhaps towards the latter part of this year and going into 2017. As an entire economy we all rely on global and domestic changes to dictate our interest rate so the property market will be forced to react to certain external factors. However, the economic perspective shows that the house-buying market is likely to stall this year. The buy-to-let market and private rental sector continues to prop up the UK housing industry and there is no indication that it will lose any of its power in 2016, even taking into account April’s stamp duty levy.
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