Majority of investors and savers think UK base rate will rise by next year, poll shows

News - Banking

Written by Ray Clancy

Thursday, 05 August 2010 08:12

Some 67% of investors in the UK think base rates will rise by next year with some even pointing to 2% or higher next year.

This is in contrast to a recent forecast from Ernst and Young’s ITEM club which suggests that the base rate will remain on hold until the end of 2013.

But it is in keeping with former Bank of England deputy governor, Sir John Gieve, who has warned that interest rates will have to rise earlier and more sharply than expected to keep inflation under control.

Speaking recently at the Fathom Financial Consulting’s Monetary Policy Forum, Sir John said he ‘wouldn't be at all surprised to see interest rates at 2.5% a year from now’.

The majority of savers and investors agree with him, according to the latest survey by the Fair Investment Company which found that some 67% of respondents said they thought the base rate would be higher than 0.5% by July 2011.

Some 30% believe that a half point increase to 1% is likely, 29% think it will hit 1.5% in 12 months time while 5% predicting it will hit 2% next year and 3% opting for more than 2%.

It flies in the face of predictions by most analysts who do not see a rise for some time. ‘Even though the majority of people polled said they thought the base rate would be higher by next year, I still think it is unlikely. If the economy has any real chance of recovering the base rate has to stay low,’ said Nick Scarrett, head of investment and pensions at Fair Investment.

‘The poll was taken before Ernst and Young’s or Sir John’s predictions, so it is interesting to see what our investors thought without the benefit of this knowledge. Although most predicted a rise, 31% had the same view as the most analysts that it would still be at 0.5% in a year’s time,’ he added.

Predictions differed between ages, with youngsters tending to be more in line with analysts’ predictions than older respondents. Of those aged between 18 and 30, 67% said it would stay at 0.5%, while 91% of those aged between 31 and 40 thought it would be higher. Some 60% of those aged between 41 and 50 said it would be higher, while in the 51 to 60 age group 60% predicted a rise and in the over 60s, 77% said it would be higher next year.

‘It is interesting to see the breakdown between the age groups. The vast majority of those aged 30 and under seem to think the rate will remain at 0.5% while in all the other age groups, the majority think it will be higher,’ explained Scarrett.

‘This is probably a result of people saying where they want the base rate to be rather than what they actually think, because younger people are borrowing and therefore want it to stay low to keep their payments down, whereas older people are saving so want it to go up,’ he added.

But even if the base rate does creep up slightly, there is no saying that savings rates will follow suit, he warned savers.