Investors and savers think UK bank base rate will rise in next 12 months but expert opinion is divided

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Written by Ray Clancy

Friday, 10 September 2010 08:30

Some 69% think the UK base rate will rise by August 2011 despite the Bank of England holding rates at an historic low for the last 18 months, research shows.

According to the poll by the Fair Investment Company, some 30% of respondents said they thought the base rate would stay the same. Some 69% thought it would rise with 38% predicting a rise to 1% and 28% predicting a rise to 1.5% Some 3% thought it would be 2% or higher.

The results are very similar to those from the company’s July poll, where 67% predicted a rise, again, with most predicting it would be 1 to 1.5% in a year’s time.

‘Back in July, most analysts were firmly of the view that the base rate would have to remain on hold for the foreseeable future, with Ernst and Young’s ITEM forecast predicting no change until at least the end of 2013,’ said Nick Scarrett, head of investment and pensions at Fair Investment Company.

‘At the time, the only senior economist to have predicted an earlier rise was former Bank of England deputy governor, Sir John Gieve, but now, it seems many more analysts agree that we will see sharp rises much earlier than originally predicted,’ he added.

Alan Clarke, an economist at BNP Paribas, suggests when rates do start rising, they will do so at a ‘fairly chunky pace’ and predicts a rise to 2.5% by the end of 2012. While Peter Williams, executive director at the Intermediary Mortgage Lenders Association thinks modest rate rises need to start now. ‘We need to begin the march back to a sense of normality,’ he said.

But the vast majority of analysts still do not see a rise for some time. ‘Although many economists are predicting rises earlier than originally thought, there is still no real suggestion that the rate will rise by this time next year,’ said Scarrett.

‘But even if the base rate does rise by half a per cent or so, there is no guarantee that savings rates will follow. The base rate has remained unchanged for 18 months but savings rates have still fallen,’ he explained.

‘Savers should consider getting a fixed rate savings account before savings rates fall any further, while borrowers should just take advantage of low loan and mortgage rates and think about over paying if they can afford to in order to take years and or capital off their loan,’ he added.

Savers are hoping that the base rate will rise sooner rather than later, according to Kevin Mountford, head of banking at moneysupermarket.com. ‘Whilst interest rates inevitably need to increase at some point, the economy remains in a delicate state so it could still be some time before we see any movement,’ he said.

‘To make matters worse for the nation’s struggling savers, the average interest rates across the leading easy access accounts has actually fallen over the last 18 months from 2.98% to 2.72% despite the base rate remaining flat. This 0.26% decrease illustrates the degree to which Britain’s banks have capitalised on the low base rate environment to the detriment of their customers’ savings pots,’ he explained.

‘That said, the leading savings rates are significantly higher than the rates of interest most people are earning on their money. The average instant access account is paying just 0.23% while the leading deal is paying 2.80%. And if you have money you can afford to lock away you can earn even more,’ he added.

He urges savers to be more pro-active. ‘Even though the base rate may not have changed for 18 months, there is still every reason for savers to ensure that they are getting the best return possible in this low rate environment. Now is the time for people to be squeezing as much value as they can from their savings by shopping around, utilising their full ISA allowance and switching to the best possible deal,’ said Mountford.