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Why rates will not go up this side of the election

There has been much speculation over recent weeks on when the Bank of England’s Monetary Policy Committee will vote to raise Bank Rate. In fact, we've had a running bet in the office since Easter with my money going long - I dug my heels in at late 2015 at the very earliest, and whilst I appear to be a lone voice amongst the MFB "gamblers", I thought I'd set out below some of the key reasons why I don't believe we will see a pre-election rate rise.

It was only two weeks ago that analysts were predicting a February rise following Mark Carney's announcement that the first rate increase was not far away. Those with money on a pre-election rise were preparing their high-fives but I still can't see it.


My biggest reason for going long was the continuing slow growth in the national wage average. I have always been of the simple opinion that Bank Rate would not go up until wage growth was close to the rate of inflation. Inflation recently dropped to 1.2% but with wage growth still lagging behind at 0.7% I can't see a majority vote in the MPC. Early on, Mark Carney stated that they would be keeping an eye on real earnings when setting rates and I see no reason why this would change.


The September inflation figures are out and the Consumer Prices Index fell to 1.2% - a five year low! Fuel costs have fallen by 6% and it would appear that the price war amongst the supermarkets has led to a 1.5% reduction in food costs. We are seeing a slowdown in growth and with inflation predicted to fall further, we are unlikely to see a rate rise before the election.


Accountants BDO have recently issued their latest Business Trends report showing a steep fall in manufacturer sentiment for September. The weakening Eurozone and global political uncertainty is having an effect in a number of sectors and I would expect to see manufacturing numbers starting to plateau over the coming months.

Global Events

I cannot pretend that I saw the recent global events coming but it is safe to say that these have now contributed to uncertain markets and a delay in a rate rise. We are seeing depressing reports about deflation in Europe and over the coming days and weeks I expect there to be more doom and gloom around the Eurozone with the European Central Bank having to step in with further liquidity. The money markets are a good indicator of the longer term prospects and they are certainly rattled by recent events. Five year SWAP rates have plummeted over the last couple of weeks by over 40bps and stands at 1.68% as I write. The markets are saying that rates are going nowhere for at least 12m.

And we also have continued uncertainty in the Middle East, the war on Islamic State and a potential Ebola pandemic to keep the markets spooked for some time. I am a born optimist but even I have to admit that the global picture is set to be very rocky over the next year or so.

As I write it would appear that analysts are starting to amend rate rise expectations to later in 2015 and for once my bet is looking safe. It was only two weeks ago that the market was calling a pre-election rate rise and who knows what they will be saying in another couple of weeks. For me, I’m sticking to my guns of a November 2015 increase but the way things have gone over the last few days, you may well hear me soon asking for bets on Bank Rate staying on hold into 2016!!


For another angle on bank rates expectations and there effect on the Buy to Let market see our article from Simon Whittaker.