What will happen to interest rates in 2017

Oliver Jones
2nd January, 2017
Money & Finance

Interest rates have been stuck at record lows for the best part of seven years and there is little prospect that this situation is going to change any time soon. The Bank of England’s bank rate is currently at 0.25 per cent – the lowest it has been at in modern times. It cut the rate from 0.5 per cent in the aftermath of the Brexit vote in June when it was widely anticipated that the British economy would fall into recession. But that didn’t happen with growth – particularly in the service sector – holding up. The Bank’s governor, Mark Carney, indicated in July that rates were likely to be cut further but that is now looking less likely with rising import costs putting pressure on inflation.

Interest rates to rise?

Yet despite the fall in the value of sterling since the referendum, Mr Carney has said that it is unlikely that it will be raising rates. He said in October:

We’re willing to tolerate a bit of an overshoot in inflation over the course of the next few years in order… to cushion the blow and make sure the economy can adjust as well as possible.

Many economists now expect inflation to start rising in the New Year as higher import costs start to filter through. Britain imports far more than it exports and so any fluctuation in the exchange rate can have a disproportionate effect on the price of goods for UK consumers.

One leading economist, Howard Archer, of IHS Global Insight, said:

We expect consumer price inflation to reach 3 per cent by end-2017/early-2018 and the upside risks to this forecast are rising.

He had expected the Bank of England to cut interest rates to 0.1 per cent in November but encouraging output figures meant that this did not happen. But, he says, he expects them to now be cut to 0.1 per cent early in the New Year.

What will the impact be on borrowers?

Low interest rates are good for borrowers. It is currently cheaper to borrow money in the UK than it has been at any point in modern times. Low interest rates on personal loans, mortgages and credit cards have become the norm with the result that average household debt in Britain has ballooned again after falling in the wake of the financial crisis. British households currently owe £1.5 trillion – up from £1.45 trillion in September 2015.

Should interest rates fall further, then we can expect household debt to continue to rise.

What will the impact be on savers?

Savers have not had an easy time of it for the best part of a decade. With interest rates at such low levels, the returns on any form of saving have been pitifully small. Many bank savings accounts are currently offering savings rates of less than 1 per cent. Even ISAs present a bleak picture. And should rates fall further next year, then there is no reason to suggest that the prospects will get any better.

Will wages rise in 2017?

New research shows that, while unemployment is likely to continue to fall next year, this fall will slow down during 2017 and wages are also likely to remain depressed. Guidance published recently in the quarterly CIPD/Adecco Group Labour Market Outlook, shows that the net employment will continue to grow.

However, the survey also suggests that real wages are likely to fall during 2017. For the second quarter in succession, employers say that they anticipate average pay settlements of just 1.1 per cent for the 12 months ahead. With inflation forecast to be as high as 2.5 per cent, this would mean that real incomes will fall again in 2017.

Other economists believe that unemployment will start to rise in 2017. While the unemployment rate is currently at 5 per cent, UBS forecasts that it will rise to 5.5 per cent in 2017 and 6.3 per cent in 2018.

The major influence on unemployment will be a combination of slowing growth due to inflationary pressures and companies being careful when it comes to taking on new staff. After all this is a time of high uncertainty as Britain heads towards triggering of Article 50 and Brexit. When this finally happens this will have a further negative impact on wages and spending, consumption and growth.