The base rate of interest could go up this week. Pushing up the cost of mortgages and other borrowing, but giving savers better returns in a move that has been expected for almost a decade now (give or take an unexpected referendum result).
However, that move isn’t likely to happen this week.
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On Thursday 10 May, the Bank of England’s (BoE) nine strong Monetary Policy Committee (MPC) will vote on whether to take the base rate up from 0.5%, a level it hasn’t been above since 2009.
But a number of pressures mean that it’s looking likely they’ll delay the anticipated rise, again.
Slow growth holding back a rate rise
It may be hard to remember the ‘beast from the east‘ after the blissful heat of a balmy bank holiday, but the UK service sector was hit hard by the inclement weather of the spring.
The Purchasing Managers Index (a performance measure for the service industry) was showing growth slower than hoped by many in the City, and job creation in the service sector hit a year on year low last month.
The pound has fallen to $1.36 against the US dollar following the release of these figures, a sharp fall for sterling which was valued at nearly $1.43 last week.
So it’s likely that the MPC might be wary of raising the base rate just now, as putting a collar on consumer spending could hurt the wider economy.
However, the need to raise the base rate has remained an evident challenge for a while with the rate of inflation above the BoE’s target of 2%.
Mortgage rates – the lowest they can go?
Mortgage rates steadily fell over the past decade after the BoE took the base rate to an unprecedented low of 0.5% (the historical average is around 5%), and halved that to 0.25% as a calming measure after the unexpected Brexit vote.
But the lowest ever mortgage rates have already started to disappear from the market as lenders anticipate a rate rise.
There were concerns that many borrowers who have never known a rate rise would struggle to afford their mortgage if the base rate went up.
Though, we’re unlikely to see a return to the 15% interest rates from the 1980s, with Governor Mark Carney saying when the base rate does go up, it’ll be to “half of historical levels” so that’s a gradual rise to around 2.5%.
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Saving rates – too low for too long?
Savers have been suffering with low rates for almost ten years when savings rates followed the base rate to the bottom following the 2008/09 financial crisis.
Those with cash deposits have in many cases been earning interest rates below the rate of inflation for several years, with savers looking to the BoE hoping for the rate to be taken up.
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Could this be the end of a cheap credit boom?
Over the past few years credit cards and loans saw some of the lowest interest rates and longest 0% periods ever.
However, 0% periods have been getting steadily shorter and APRs have been creeping up, but you can still avoid interest on your card debt for up to three years (though this is down from the 43 months of a year or so ago).
Though, with personal loan rates starting from 2.7% from Sainsburys, and RBS and Natwest willing to lend up to £50,000 at a rate of 6.9% as an unsecured loan, there’s no sign of lenders being dramatically spooked by the impending possibility of a rate rise.