69% think base rate will rise by August 2011

69% think base rate will rise by August 2011

07 September 2010 / by Rachel Mason

While interest rates are expected to be kept on hold at 0.5% for the 19th consecutive month when the Bank of England's Monetary Policy Committee (MPC) meets on Thursday, more than two thirds of respondents to a Fair Investment Company survey think it will have risen by this time next year.

According to the poll, 30 per cent of respondents said they thought the base rate would stay the same, while 69 per cent thought it would rise with 38 per cent predicting a rise to one per cent and 28 per cent predicting a rise to 1.5 per cent. Just three per cent thought it would be two per cent or higher.

The results are very similar to those from July's poll, where 67 per cent predicted a rise, again, with most predicting it would be one per cent or 1.5 per cent in a year's time.

"Back in July, most analysts were firmly of the view that the base rate would have to remain on hold for the foreseeable future, with Ernst and Young's ITEM forecast predicting no change until at least the end of 2013," said Nick Scarrett, head of investment and pensions at Fair Investment Company.

"At the time, the only senior economist to have predicted an earlier rise was former Bank of England deputy governor, Sir John Gieve, but now, it seems many more analysts agree that we will see sharp rises much earlier than originally predicted."

Alan Clarke, economist at BNP Paribas suggests when rates do start rising, they will do so at a "fairly chunky pace,", and predicts a rise to 2.5 per cent by the end of 2012. While Peter Williams, executive director at the Intermediary Mortgage Lenders Association thinks modest rate rises need to start now "we need to begin the march back to a sense of normality" he says, and urges the MPC to vote for a 0.25 per cent rise on Thursday.

"The vast majority of analysts still do not see a rise for some time, and the Bank of England is almost certainly going to leave the base rate as it is on Thursday in an attempt to protect the economy's somewhat muted recovery from a deep recession," said Nick, " and although many economists are predicting rises earlier than originally thought, there is still no real suggestion that the rate will rise by this time next year."

He continues, "the majority of our respondents have predicted a rise, as they did last month, and although there may be something to take from this, I think it is more wishful thinking than a real prediction, as most of our respondents are over 50 and are going to be more affected by low savings rates than high borrowing rates.

"But even if the base rate does rise by half a per cent or so, there is no guarantee that savings rates will follow - the base rate has remained unchanged for 18 months but savings rates have still fallen.

"Savers should consider getting a fixed rate savings account before savings rates fall any further, while borrowers should just take advantage of low loan and mortgage rates and think about over paying if they can afford to in order to take years and/or capital off their loan."