Outlook for UK Interest Rates 2009-2010

interest-rates-feb-08

This graph shows how much interest rates have fallen in the UK.

  • The Bank of England base rate is the main ‘official interest rate’
  • The 3 month libor rate is the rate at which banks lend to each other. It is important for determining interest rates set by the commercial banks.

Interest Rates are likely to keep falling in 2009 because:

  1. Increase in spare capacity. GDP is forecast to fall 4%
  2. Rise in unemployment to over 2 million and forecast to keep rising close to 3 million.
  3. Fall in inflation to 0.6% by end of year. (see: Bof E inflation report)
  4. Prospect of deflation in 2010.
  5. Global recession is deepening meaning UK economy will struggle to recover despite low interest rates, falling pound and tax cuts.

The Bank of England is worried that inflation is falling close to 0%. They fear that very low inflation or deflation could lead to further falls in consumer spending. Interest rates will fall to try and encourage people to spend and invest to avoid an even bigger fall in output.

Will 0% interest rates help?

  • It is not certain how much 0% interest rates will help stimulate the economy. The cost of borrowing has already fallen significantly, but, the main problem is lack of finance not the cost of borrowing.
  • Some people with variable mortgages will have more disposable income though. Future fixed rate mortgages will be cheaper as low interest rates are likely to persist.
  • Savers won’t be happy at more falls in the interest rate. This will lead to even lower payments for them. However, the good news for savers is the lower inflation rate will improve the real interest rate

5 thoughts on “Outlook for UK Interest Rates 2009-2010”

  1. At some point the combination of lower base rates, exchange and commodity prices will revive the economy its just when.

    Currently it seems unlikely that demand will recover until 2010 maybe 2011

  2. Where can I find a reliable forecast of interest rates over the next 5 years. I have seen wild claims of everything from a minus figure in 2010 to 15%.

    I am interested in likely mortgage rates.

    Is it likely that interest rates could rise by 1% a year over the next 5 years.

  3. I guess the answer now to the question from Charles “Where can I find a reliable forecast of interest rates over the next 5 years” is nowhere! If there was such a source we would all borrow/invest based on its predictions and in due time become millionaires!

    Alternatively the answer can be provided in 5 years time!

  4. Are Building Societies and Banks reasonable safe again?
    Where can I invest safely and get a reasonable return?

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