Most analysts expect the Bank of England to start hiking base rates from the spring. One or two have even gone out on a limb and expect the first base rate hike in November.
Homeowners have been issued with dire warnings of what will happen when rates finally do start rising, and their mortgage repayments start multiplying.
Savers, on the other hand, have been told they will finally have something to celebrate.
But I wouldn’t get worked up just yet. Because rates may not rise in 2015 at all, or 2016 for that matter. In fact, they could stay low for a decade. Or maybe two.
Cold Turkeys
Don’t believe me? When the Bank of England slashed base rates to 0.5% in March 2009, it was supposed to be a temporary measure.
Five and a half years later, rates remain frozen at this 316-year low. In the US, rates are stuck at 0.25%. Policymakers talk about raising them, but they don’t actually do anything.
They know we’re addicted to low interest rates. They’re too scared to give them up.
Down, Down, Down
In Europe, rates are heading down rather than up.
The European Central Bank cut all three of its main interest rates by 0.1% in September, taking its benchmark rate to 0.05%.
In June, it introduced negative rates, cutting commercial banking rates to -0.1%. None of this will prevent the eurozone from sliding ever closer towards deflation.
Will this ever end?
Turning Japanese
Ask the Japanese. They’ve had more than two decades of rock-bottom interest rates. Today, rates are 0%.
Like Japan, the West is also inflicted by stagnating growth and an ageing population. If rates can stay at virtually zero for 20 years over there, the same can happen here.
There is little inflationary pressure today. In the UK, CPI inflation has just fallen to 1.5%, comfortably below the Bank of England’s target of 2%.
Unemployment may be falling, but wage growth is flat, up just 0.7% in the last year. The Bank of England is unlikely to stop hiking rates until wages start rising. Who knows when that will happen.
The money markets think they have an idea. Swap rates, which lenders used to price their mortgages, are falling again. Woolwich, Nationwide, West Bromwich, First Direct, Yorkshire Building Society and HSBC have all cut their five-year fixed rates in recent days, to below 3%.
They clearly don’t expect interest rates to rise for some time.
Slow, Slow, Slow
If Scotland votes for independence, any base rate hike is likely to be shoved well back into the future, to help the UK recover from the economic shock.
Even if they vote No, rates may hardly budge. There are signs the UK recovery is slowing anyway. In August, manufacturing activity grew at its slowest rate in 14 months.
Productivity refuses to improve, hampered by a lack of capital investment.
Some 51% of consumers saying they have cut spending to cover the rising cost of living, according to new research from MGM Advantage. That will also slow the recovery.
Low Rates Forever
I’m in the minority here. Nine out of 10 investors expect interest rates to rise in the next 12 months, according to a new survey by Hargreaves Lansdown.
Swap rates are telling me a different story. So is flat wage growth, falling inflation, eurozone decline and the Japanese precedent.
Interest rates aren’t going anywhere fast.