‘No base rate rise until 2017’, say markets as eurozone crisis batters British economic prospects

  • Lenders respond with cuts to fixed-rate mortgages

The Bank of England will not raise the UK base rate until 2017, money markets were predicting today.
The forecast for the first rise is now further away than at any time since the financial crisis began.
The latest swing in sentiment was driven by the latest phase of the eurozone crisis and the impact it will have on the UK.
Borrowers should not base their decisions on interest ratefutures, as the market is volatile and the outlook can change quickly.
Traders deem it unlikely that the British economy, which re-entered recession over the winter, would be able to cope with a rate rise for years to come. 
Decision makers: The Bank of England decides on rates

Decision makers: The Bank of England decides on rates
Money markets were today pricing in December 2016 or January 2017 for the first rise in the Bank’s official guidance for the cost of borrowing. A month ago these swap rate markets priced the first increase to come in 2014.
However, the view of traders continues to conflict with the consensus view of economists who expect rates to start rising much sooner.
The Ernst & Young ITEM Club, a group of economists, today said it expected the Monetary Policy Committee to keep rates on hold ‘for at least another year’.
 
It said: ‘If global input cost inflation increases again and the domestic economy begins to recover in the manner in which we anticipate, then the MPC will come under increasing pressure to begin increasing bank rate from the middle of next year.’
It expects rates to return to the ‘normal’ 4 per cent or 5 per cent by 2015.
Other economists have taken a far more dovish stance. Capital Economics, which has long predicted rates would stay low, recently predicted the first rise would not come until 2015.
Predictions of the first rise have marched into the distance as Britain’s economic prospects have worsened.
How projections for interest rates have shifted in the last month - Source: Bloomberg

How projections for interest rates have shifted in the last month – Source: Bloomberg
Official data confirmed last month that the UK economy had re-entered recession – the first double-dip recession since 1975.
The ‘double dip’ is defined as a return to recession before the economy has recovered back to its original peak. 
The British economy is still 4 per cent smaller than it was at the peak in 2008 and at the weekend, Bank of England chief economist Spencer Dale warned it would not get back to pre-crisis levels of output until 2014.
The long-haul back from the ‘Great Recession’ has been slower and weaker even than the four-year recovery from the Great Depression in the 1930s.
Meanwhile, it emerged last week that inflation had fallen to 3 per cent in April – still above the Bank’s target of 2 per cent but down from 3.5 per cent the month before. 
The fall in price pressure has also helped move the swap rates market, where traders buy and sell blocks of money based on where they expect future rates to be.
But the problems in the eurozone have been the main catalyst for the repricing of rates forecasts.
Spain’s borrowing costs rose again today after plans to recapitalise Bankia were taken as a sign the country would struggle to shore up its banks. 
The yield on 10-year Spanish bonds rose to 6.5 per cent, climbing towards the tipping point of 7 per cent which last year saw Ireland and Portugal  forced to seek bailouts from the European Union and International Monetary Fund.
The interest rate is at its highest since November when the European Central Bank was forced to step in and buy Spain’s debt to bring yields down.
These concerns have spilled on to the UK’s money markets, and the movement on these swap rates, where banks borrow and lend, appears to be having a knock-on effect on some consumer borrowing rates.
That’s because money markets also affect the pricing of fixed-rate mortgages and savings. And today Barclays and Virgin Money both announced they would cut some of the rates on fixed mortgage deals by 0.2 per cent.

Read more: Source



Categories: News mix

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