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Slowdown in China might push interest rate rise in May

By Damian Clarkson

Published 02/09/2015

Mark Carney
Mark Carney

Interest rates will most likely rise in May next year, an economist has predicted.

Howard Archer, chief European & UK economist at IHS Global Insight, believes the Bank of England will hike the base rate to 0.75% in the second quarter of 2016, then raise it gradually to 1.25% by year end.

Should that prediction prove correct, it would mean a sharp rise in repayments for households with tracker or variable rate mortgages.

On a £100,000 loan over 25 years, a hike in the base rate to 1.25% would see their repayments rise by £40 a month, or £480 a year.

On a £150,000 loan, repayments would rise £60 a month or £720 a year. But an increase in the base rate would be welcome news to those with savings, as it would boost savings rates after years of miserly returns.

Speaking about the possible factors influencing the timing of a rate hike, Mr Archer pointed to the slowdown in China and the possibility of a recurrence of financial market turmoil.

"It is possible that increased uncertainty over China could have some near-term dampening impact on business investment, but again we believe it is likely to hold up well after strong growth in the first half of the year," he said.

"With the economy now seeing extended healthy growth, there is likely to be an increasing need for businesses to invest to add capacity over the coming months, while higher earnings growth may well increasingly encourage companies to invest in plant and equipment and in processes to try to save labour.

"Mark Carney has indicated that the Bank of England's decision on when to move interest rates up will remain dependent on how UK economic data develops over the coming months. Sterling's performance will also obviously be an important factor - as the stronger it is, the more the potential dampening impact on UK growth and inflation.

"And clearly the Bank of England will be keeping a very close eye on events in China and any knock-on effect on the global economy.

"At this stage, we are minded to slightly put back our expected first interest rate hike from 0.50% to 0.75% by the Bank of England from February 2016 to May 2016, but we would by no means rule out a move in the first quarter.

"Thereafter, we still expect interest rates to rise gradually to 1.25% by the end of 2016, 2.00% by the end of 2017 and 2.50% by the end of 2018." But at an annual get-together of central bank bosses in Jackson Hole, Wyoming, Bank of England governor Mr Carney said that the current concerns over China were outweighed by the "ongoing domestic strength" of the UK market, credible policy and an "increasingly robust financial system".

"The direct exposure of the UK economy to China is relatively modest. Developments in China are unlikely to change the process of rate increases," he said.

In July, Mr Carney gave strong hints that interest rates would rise by early 2016, adding that they would probably go up slowly and would reach a level "about half as high as historical averages" of 4.5%.

Belfast Telegraph

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