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It will be incremental when the rate rises do come, but the Bank of England wants a sustained recovery first
Those of us who write about economics for a living know the signs. A work colleague sidles over, ostensibly for a gossip, but really to ask one question. "Is this the right time to take out a fixed-rate mortgage?"
To be fair, it is not a query that has surfaced much for the past five years. The Bank of England cut its official lending rate to 0.5% in March 2009 and it has remained at that level – the lowest since the Old Lady first opened its doors in 1694 – ever since. Borrowing costs have remained low because the economy has struggled to recover from the worst recession in modern history. Only a financial masochist, desperate to throw money away, would have considered taking out a fixed-rate mortgage.
But the economy is recovering. Unemployment is coming down, and growth has picked up. Interest rates are not going to remain at 0.5% forever, and millions of borrowers want to know when Mark Carney and the other eight members of the Bank's monetary policy committee, will start to tighten policy.
For the time being, mortgage payers can rest easy. The Bank wants to ensure that economic recovery is here to stay before it raises rates and is concerned about moving too soon. Why? Because the improvement seen since the spring of 2013 has happened despite a continued squeeze on real incomes. Threadneedle Street believes that a sustained recovery will require earnings to start rising faster than prices, something that has not happened for several years.
The Bank's job in keeping borrowing costs down is being aided by recent favourable trends in inflation, which is now back to its 2% target for the first time in more than four years. Further easing of price pressures can be expected over the coming months, allowing the Bank to argue that an ultra-loose approach to interest rates poses no inflationary threat.
To those who point to rising house prices as evidence of another bubble in the making, Carney will say that the Bank has the tools to cool down the residential property market without recourse to the blunt instrument of interest rates.
As a result, a rate rise looks unlikely during 2014 and, unless inflation takes a dramatic turn for the worse, or the Bank discovers that its new tools are inadequate to cope with an overheating housing market, probably the first half of 2015 as well. As 2014 wears on, there will certainly be talk of whether the first rate rise will arrive before or after the May 2015 general election. Mid-to-late 2015 is currently the City's best bet.
A word of warning, though. When the Bank finally does move, it will be because it considers that an emergency level of interest rates is no longer required. Borrowing costs will move up – in baby steps – to a more normal level. That may be lower than the pre-crisis average of around 5%, but is still likely to be around 3%.
