The first rise in UK interest rates could be delayed until autumn 2016, according to City expectations, as market turmoil in China raises the prospect of historically low borrowing costs staying in place for longer than expected.
The forecasts came as signs emerged of homeowners scrambling to remortgage over the past month in anticipation of a rate increase that might now be delayed.
On Wednesday, the British Bankers Association (BBA) said the number of people moving to fix their loans at low rates was at its highest level for four years. It followed Bank of England governor Mark Carney’s indication in mid-July that the Bank could raise interest rates early next year.
With the FTSE down 15% from its April high, however, and China cutting interest rates to prop up its slowing economy, City traders have rapidly lost confidence about rate rises in Britain.
Market traders had been priced in a rise from the current rate of 0.5% next May, according to analysis by Capital Economics, but in the past few days this has been set back to late September or early October 2016.
Michael Saunders, chief UK economist at the investment bank Citi, said his main forecast was still that the Bank would raise rates in early 2016, but added: “It would not be a big step to expect that bank rate at end-2016 will still be 0.5%”.
Reactions to the market selloff may be overblown, said Paul Hollingsworth, UK economist at Capital Economics. “Recent equity market volatility and the further fall in commodity prices is probably the final nail in the coffin for those entertaining the possibility of a rise in bank rate this year. But we think markets have gone too far in expecting the MPC to hold off until October next year,” he said.
“China’s recent economic data suggest that growth remains sluggish, but not weak enough to justify fears of a ‘hard landing’. In addition, the UK’s trade links are still fairly small, with only around 5% of goods exports going to China.”
The BBA’s figures for the housing market show that mortgage approvals in July were 15% higher than a year ago and house purchases rose 11%.
Richard Woolhouse, the BBA’s chief economist, said: “Everything that has happened in China this week puts the likelihood of that rise back two to three months. But even if rates do go up in the near future, I don’t think mortgage rates will go up as much and, in any case, this won’t impact much on people’s decision to buy a house.”
He said that people would still do “whatever they can” to get on the housing market in the face of continuing house price rises. Even if they are delayed, rate rises will be small and gradual, rising to 3% over the next five years, he predicted.
“Even if rates go up faster than expected I don’t think that would affect the housing market. The fact is that price rises are being driven by a shortage of housing and demand outstripping supply,” he said.
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