Will interest rates rise in 2017?

Bank sign carved in stone

On Thursday 15th June 2017 the Monetary Policy Committee (MPC) of the Bank of England announced the result of a vote on whether to increase interest rates. The majority for a vote against a rise narrowed, with a 5-3 result. This means that, for now, interest rates will remain the same at 0.25%, but for how long?

The MPC meets eight times a year in order to agree the interest rate. At their most recent vote, the markets were shocked to find that, (as opposed to the vote in May, just a month prior when the result was 7-1 against a rise), two additional members voted in favour of an increase, taking the outcome to 5-3 against.

In February this year the entire committee was unanimously against a rise, so this move towards a vote in favour of an increase clearly poses the risk there may be one on the horizon.

What are the factors at play?

The most significant factor when making the decision to increase interest rates is the level of inflation, which has risen from 0.6% in July 2016 to 2.9% in May 2017 and forecast to be 2.96% in June, rising to 3% in August of this year.

Commercial Trust’s chief executive Andrew Turner urged the MPC to keep to their previous plans to hold back from increasing rates:

At a time when the economy is fragile, the government is weak and there is a wealth of uncertainty over Brexit, I question why the MPC would increase interest rates, which would only cause further problems in moving towards any semblance of financial stability for the country.

It has been accepted by the Committee that inflation would continue to rise for some time yet, but the increase in wages expected by the Bank of England has not come to pass, and business investment is lacklustre at best. These amongst other reasons led the MPC to say that they would not impose a rise and I hope they keep to that original plan.

What is the impact of a rise for landlords?

Should the next vote tip in favour of an increase in interest rates Andrew Turner had this to say:

The outcome of the June vote means that an increase in interest rates is certainly a possibility for the near future.

For landlords an interest rate rise would place more pressure on their business model and would reduce the amount available for them to borrow via a buy-to-let mortgage.

I urge every landlord to plan ahead, make any revisions necessary to your strategy and then utilise the expertise of a specialist broker such as ourselves to identify a suitable product to meet that need.

Why a specialist and not your family financial advisor, or a generalist mortgage broker?

At no time prior to now has the buy-to-let marketplace ever been this complex. A specialist will have the capacity to follow the changes at hand and communicate on a daily - if not hourly - basis with the various lenders, to understand in detail the mortgage options available. When you are spending the sums of money we are talking about, why would anyone take the risk of anything but the very best advice and service?

What to expect from the next MPC vote on interest rates

The next meeting and vote will take place in two months’ time and the result of that vote will be announced on Thursday 3rd August 2017.

Professor Kristin Forbes has consistently voted to increase interest rates to 0.5% for the last three votes in March, May and June; but in June’s vote, Ian McCafferty and Michael Saunders also voted for an increase to 0.50%. These three members of the committee are all from outside of the Bank of England, and contribute independent experience and expertise in the subjects of economics and monetary policy.

Professor Forbes will not be involved in the next vote, as at the end of June 2017 she is set to return to Massachusetts in the USA to continue full-time as Jerome and Dorothy Lemelson Professor of Management and Global Economics at the Sloan School of Management at the Massachusetts Institute of Technology.

If there is a vote to increase interest rates, the evidence laid out through this month’s outcome might suggest that 0.50% would be the favoured amount, however, this is purely speculation and the MPC could choose any amount, based upon the data infront of them and any conclusion they draw from it.

Whether the loss of a likely pro-increase vote from Professor Forbes will impact the overall outcome is yet to be seen, but better to prepare for such an outcome in your investment strategy than not.

By failing to prepare, you are preparing to fail

- Benjamin Franklin.

UPDATE 20/06/17: In a speech at Mansion House in London Mark Carney says "it is not yet the time" to start raising interest rates.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.