67% think base rate will rise by next year

67% think base rate will rise by next year

04 August 2010 / by Rachel Mason

Contrary to Ernst and Young's ITEM forecast which suggests that the base rate will remain on hold until the end of 2013, former Bank of England deputy-governor, Sir John Gieve has warned that interest rates will have to rise earlier and more sharply than expected to keep inflation under control.

Speaking at Fathom Financial Consulting’s Monetary Policy Forum, Sir John said he "wouldn’t be at all surprised to see interest rates at 2.5 per cent a year from now," and it seems that the majority of savers and investors agree with him.

In a poll conducted by Fair Investment Company just prior to Ernst and Young's announcement last week, 67 per cent of respondents said they thought the base rate would be higher than 0.5 per cent by July 2011, with 30 per cent predicting a half point increase to 1 per cent and 29 per cent saying they thought it would hit 1.50 per cent in 12 months time.

A few thought it would be even higher – five per cent said they thought the base rate would hit two per cent  y next year with three per cent predicting it to be more than two per cent, which is Sir John's prediction.

"The vast majority of analysts 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 strike a balance between the risk of inflation and keeping the economic recovery on track," said Nick Scarrett, head of investment and pensions at Fair Investment Company.

"So 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."

Predictions differed between ages, with youngsters tending to be more in line with analysts' predictions than older respondents. Of those aged between 18 and 30, 67 per cent said it would stay at 0.5 per cent, while 91 per cent of those aged between 31 and 40 thought it would be higher. Sixty per cent of those aged between 41 and 50 said it would be higher, in the 51-60 age group, 60 per cent predicted a rise, while in the over 60s, 77 per cent said it would be higher next year.

"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.

"This is probably a result of people saying where they want the base rate to be rather than what they actually think, because younger people are borrowing, and therefore want it to stay low to keep their payments down, whereas older people are saving so want it to go up.

"But even if the base rate does creep up slightly, there is no saying that savings rates will follow suit. In the 17 months that the rate has been at 0.5 per cent, savings rates have been falling, so it is with this in mind that savers should consider getting a fixed rate savings account before savings rates fall any further, while borrowers just continue to enjoy low loan and mortgage rates."

Notes to editors
Results from responses of 100 Fair Investment Company website users taken between June 21 and July 21 2010
Question asked: A year from now, what do you think the Bank of England base rate will be?
Answer choices:  The same - 0.5%, 1%, 1.50%, 2%, Higher than 2%, Lower than 0.5%