Coming, ready or not! - UK interest rate rises are on the way

Borrowers and savers had better get used to the idea of higher interest rates. That was the message from a leading economist and member of the Bank of England’s Monetary Policy Committee (MPC) over the weekend.

Gertjan Vlieghe suggested households and businesses should expect further hikes over the next three years.

“The outlook is, in my view, consistent with one or two quarter point rate increases per year over the forecast period,” he said.

It’s almost inconceivable now, given the warning from the MPC minutes last week, that there will not be a rate hike in May.

For savers and pensioners this would be no bad thing. They have endured nearly a decade of ultra-low interest rates as inflation has eaten away at their nest eggs and pension incomes.

Significant uncertainty

A series of quarter-point rises over the next three years would take us to interest rates of around two per cent.

Clearly this will be a major worry for mortgage payers and borrowers as it will see their borrowing costs rise significantly if they are unlucky enough to not be on a fixed rate product.

But this may not be the full story. Mr Vlieghe added that there was “significant uncertainty about the path of rates” and said that “both lower and higher paths are possible, depending on how the economy evolves.”

This column has suggested before that the MPC may attempt to hike interest rates this year in order to provide itself with a bit of wriggle room in the event of an economic downturn.

The comments from Mr Vlieghe seem to all but confirm that this type of thinking now holds sway within Threadneedle Street.

It also suggests there is scepticism about how well the economy will perform in the next few years.

Shallow recovery

Having climbed out of recession, the UK economy is hardly firing on all cylinders. The economic recovery has been a shallow one. In the past 12 months, Britain’s GDP growth has remained below the post-2012 average of two per cent a year, while other economies have shown signs of accelerating away from the grip of the financial crisis.

With wages picking up and inflation easing, the MPC will judge May to be the best chance it has to raise interest rates without causing too much damage. Assuming that is, economic growth in the first quarter proves relatively resilient.

Even if it doesn’t, there may be worse to come around the corner from Brexit or a trade war between the US and China that derails the global economy.

The fact that an MPC member is briefing that interest rates could still come back down again suggests there is genuine fear about the economic outlook.

The Bank of England wants to have its most effective weapon to hand in case it is needed again.

So, it must hike rates now, and possibly twice this year, or else face a much bigger problem if, or when, the economy slides into recession in the year or two to come.

Had the economy ever reached Mark Carney’s hoped-for escape velocity (remember when he promised the economy would achieve that?), we might not be here.

But then again if it had, interest rates would already be at two per cent.

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