It’s the question that’s always at the back of property buyers and investors’ minds: just when and by how much will interest rates rise in the coming years? It’s also a subject that somewhat unsurprisingly; Canadian Bank of England governor Mark Carney has grappled with extensively. Introducing “forward guidance” when he took the top job in the summer of 2013, he originally said a raise from the current record low of 0.5 percent would come when unemployment hit seven percent. However, that happened quicker than anticipated, and unemployment now stands at 7.1 percent after the British economy grew much faster than predicted.
In response, Carney said that the threshold was simply a guideline and that the Bank’s policy was working and helped to increase growth overall. The Bank’s inflation report released last Wednesday said that the rate “may need to remain at low levels for some time to come”. The rate policy is now set to be determined not by just unemployment, but by a wider range of indicators, such as real wages; which are still falling behind inflation. Carney also warned the recovery wasn’t very secure and that rates will only rise very slowly when they do eventually increase. He added that he was effectively “powerless” to control soaring prices and played down the possibilities of a bubble.
It therefore seems that despite the fact that the UK economy is showing the green shoots of recovery, Carney is concerned that it’s still far too weak to risk any rate rise in the near future. After all, an increase would spark a rise in mortgage repayments for millions of borrowers after they’ve been at a record low for nearly five years. Going forward, it’s become clear that the Bank will be producing forecasts on a range of factors based on market expectations of two percent interest rates by 2017 and a first rise in spring next year, likely to come after the General Election. Beyond 2017, the message is that even when the economy has returned to ‘normal’ the rate is likely to stay below five percent.
Carney also noted that Britain’s economy is 1.3 percent smaller than before the 2008 recession and that the government’s austerity measures to deal with the structural defecit will remain in place for the foreseeable future. Inflation has fallen back to the Bank’s target of two percent for the first time in four years, taking the pressure off to raise rates. UK output rose by 0.7 percent in the fourth quarter, against 0.8 percent in the previous three months.
So good news all round for homeowners. Borrowers everywhere can breathe a sigh of relief and those looking to invest and benefit from low rates have nothing to worry about for a while. It seems as if the housing market, particularly in prime areas of London, is likely to see sustained growth going forward.