Head of Research Nicola Almond says UK interest rates are not expected to rise despite yesterday’s increase in the US
The US Federal Reserve raised its benchmark interest rate yesterday by 0.25% to 1%, as inflation rose to 2.2% in February – above the target of 2%.
Although inflation is also rising in the UK, the Bank of England is not expected to follow suit with a rate rise, due to fears of an adverse impact on the economy and concerns over Brexit.
UK inflation is facing upward pressure due to post-Brexit sterling weakness, rising from 1.6% in January to 1.8% in February. This quarter it is forecast to be 2%, rising further to 2.7% in early 2018 before falling to 2.6% in early 2019.
This is the second US rate rise in three months, and the first of three interest rate rises expected this year. Whilst rates are expected to climb steadily thereafter, some commentators expect rates to stick at around 2%, whilst others see them returning in the longer term to pre-crash levels of 4%-5%.
The UK benchmark rate was cut from to 0.5% to 0.25% last August. This was the first rate change in over 7 years. Most commentators expect the rate to remain unchanged at 0.25% in 2017 and 2018. This may change however if inflation rises faster than expected and economic growth exceeds expectations.
The US rate rise may put some upward pressure on UK mortgage rates, which have recently seen some increases in long term 10 year fixed deals from historic lows.