Interest rate predictions bucked by senior economist

Interest rate predictions bucked by senior economist

05 August 2010 / by Rachel Mason

Sir John Gieve, former deputy-governor of the Bank of England, has become the most senior economist to oppose the orthodox view that interest rates will stay low until 2014.

Last week, the well respected Ernst & Young ITEM Club predicted that rates will not rise until January 2014, but speaking at the Fathom Financial Consulting’s Monetary Policy Forum yesterday, Sir John said he believed interest rates would have to rise earlier and more quickly than is currently predicted in order to keep inflation under control.

"I am expecting a recovery – when that is strongly established I’d expect rates to start rising faster than the market currently expects. I wouldn’t be at all surprised to see interest rates at 2.50 per cent a year from now," he said.

Sir John's predictions are echoed by recent research by Fair Investment Company, which found that more than two thirds of respondents believe rates will be higher by this time next year.

The poll found that 30 per cent of people predicted a half point increase to one per cent, while 29 per cent said they thought it would hit 1.50 per cent in 12 months time. This is also in line with the  markets, which expect rates to be between one per cent and 1.50 per cent this time next year according to Consensus Forecasts.

The Fair Investment research also found that some people saw an even higher rise, more in line with Sir John's predictions, with five per cent predicting the base rate to hit two per cent by July 2011 and three percent expecting a rise even higher than that.

In response to the results, Fair Investment Company's head of investment and pensions, Nick Scarrett said: "Even though the majority of people polled said they thought the base rate would be higher by next year, I still think it is unlikely -if the economy has any real chance of recovering, the base rate has to stay low.

"The poll was taken before Ernst and Young's or Sir John's predictions, so it is interesting to see what our investors thought without the benefit of this knowledge – although most predicted a rise, 31 per cent had the same view as the most analysts: that it would still be at 0.5 per cent in a year's time."

The survey also found that views about the future of the base rate differed between age groups, with  most youngster saying they thought it would stay the same (67% of 18-30 year olds) while older people all predicted a rise.

"It is interesting to see the breakdown between the age groups. The vast majority of those aged 30 and under seem to think the rate will remain at 0.5 per cent while in all the other age groups, the majority think it will be higher," said Nick.

He said this is probably more wishful thinking than real predictions, as younger people tend to be borrowing more so want rates to stay low, whereas older savers would prefer higher rates.

© Fair Investment Company Ltd