They're the working group that sets US Federal Reserve interest rates, and the short-term direction of the global economy hinges on their next decision. Their next meeting, held between March 21st and 22nd, will almost certainly include a rate hike. The question is, how big of a hike will it be, and how long will the increases continue? To answer those questions, here's a roundup of where some of the world's most influential financial players stand on the matter.
Advocates for the Fed Standing Pat
Although the prevailing wisdom holds that a rate hike this March is already in the cards, some recent economic events have pushed several analysts to revise their expectations. In recent days, Goldman Sachs, Barclays, and Wells Fargo have all made statements indicating they believe the Fed won't raise rates again at its late-March meetings. According to their analyses, the recent collapse of the Silicon Valley Bank and the seizure of Signature Bank by financial regulators shortly afterward mean the Fed will hold off on plans for further rate hikes.
They predict that the Fed will act to tame the stress caused by the turmoil in the banking sector by reversing plans for what would have been a .25 percentage point increase in the benchmark rates. The move's necessary, the analysts contend, because the market still isn't sold on the other steps taken by regulators to shore up the banking system.
Advocates for a Rate Hike
By far, the majority of market analysts still believe the Fed will go through with its hinted quarter-point rate hike at its meeting later this month. The CME group estimate of the market consensus indicates that 71.1% of the market still expects that increase at the time of this writing. The analysts at Bank of America, Citigroup, and Kansai Tokushima Management are among that majority group, with the latter having recently restated their view that the Fed would continue its increases until reaching a terminal rate of 6%.
That prognostication has to do with the US Consumer Price Index—an indicator of overall inflation—dropping to 6% in February. That indicates the fact that inflation within the Us economy continues to cool. However, the figure represented less than a half-percentage point drop from the previous month. In other words, the prior months' interest rate hikes haven't slowed inflation anywhere near as fast as the Fed would like. Therefore, it's still logical to expect that the March Fed meeting will still produce another rate increase as the Fed tries to bring inflation back down to the 2% target it typically references as its goal.
Advocates for a Rate Cut
Not everyone believes that the Fed will increase or keep rates stable. There's even an outlier opinion from Nomura Securities that predicts that the Fed will go the opposite way, cutting the rate by a quarter point instead. They also expect that the Fed will end its quantitative tightening efforts for the time being, too.
It's an opinion not shared by very many analysts. However, it's a view shared by at least a portion of the bond market. Investors in that sector have been betting since late last year that the Fed would have to cut rates at least twice before the end of 2023. That sentiment existed long before the present banking crisis. In a way, it seems that Nomura's taking it and adding present conditions into the mix to arrive at its conclusion.
The Takeaways
As of right now, the vast majority of financial analysts still expect a quarter-point rate increase to come out of the FOMC meeting later this month. However, it's not a unanimous opinion. Some heavyweights are starting to come down on the side of a pause in rate hikes. And there's still sufficient time before the FOMC meeting for more analysts to join them. However, there's still little reason to believe that the Fed will stand pat and even less reason to believe that there's a rate cut in the offing.
And as far as where the rate hikes will eventually end, there aren't many analysts willing to stand by a hard number. However, the few that do still expect the terminal rate to end up at 6%, with some forecasting numbers just slightly below that. With inflation still showing no signs of easing to a point where the Fed feels comfortable with it, there's every reason to believe that figure makes sense.
What is the Bank of England interest rate rise?
In the fourth increase since the start of December 2021, when the base rate was 0.1%, the Bank of England has raised interest rates to their highest level in 13 years. The base rate is now 1% - a 0.25% increase. This increase is in response to inflation with the Bank of England trying to regulate the economy.
What happened the last time the Bank base rate was 1%?
The last time the Bank base rate was 1% was back in 2009 when it was cut from 1.5% to 1% during the so-called “credit crunch”. The next month it was reduced to 0.5% and remained stable until August 2016. At that point, it was cut again in order to offset Brexit’s impact on the UK economy. Since then, UK borrowers have benefited from relatively low interest rates.
What will happen to mortgage payments?
Your mortgage payments will increase but only if you have a variable rate mortgage. This could be a tracker mortgage (one which follows a base rate) or a standard variable rate (one in which the interest rate is defined by the lender).
The amount that your mortgage payment will increase will depend on the type of loan. For example, a tracker mortgage will directly follow the new base rate set by the Bank of England. Reading the small print of your mortgage, you can find out how quickly the increase will be actioned. However, it is likely that by next month your payments are already likely to go up. For example, on a tracker mortgage with a current rate of 2.25%, the new rate would be 2.5%; this equates to an additional £18 per month over the next 20 years for a mortgage of £150,000.
Interestingly but also concerning is the increase in searches online for short-term loans. For example, searches of ‘payday loans near me’ and other search terms relating to high-cost-short-term finance have seen increases in the last few months and with increased costs of living, coupled with rising interest rates, this trend is expected to continue.
What does the interest rate rise mean for those on a standard variable loan?
Data shows that there are currently 1,092,000 borrowers on a standard variable rate mortgage in the UK. This means that over 1 million borrowers in the UK are subject to the interest rate set by the bank or building society. Depending on the type of variable-rate mortgage that they have, the interest rate will either increase automatically as a direct link to the base rate or at the lender’s discretion.
It is estimated that those on a variable-rate mortgage will pay approximately £504 more per year as a result of the increase (figures from UK Finance based on a £200,000 loan). This is the equivalent of approximately £42 per month more in monthly repayments.
The average standard variable rate charged by mortgage lenders is currently around 4.71% - only up 0.31% since December 2021 despite the jump in the base rate. This is because not all lenders have chosen to increase their interest rates in line with the new base rate.
Those on a tracker mortgage, with an interest rate directly linked to the base rate, are set to experience an increase of around £25.22 per month in their repayments. According to data from UK Finance, this jump will affect around 841,000 UK borrowers.
Will those with a fixed-rate mortgage be affected?
Those who have a fixed-rate mortgage, which is 75% of UK borrowers, will not be impacted by the increase in the base rate. However, they may face higher borrowing costs once their deal comes to its end and they may need to remortgage.
The cost of living squeeze
With the cost of living crisis still gripping much of Europe and the USA as well as further afield, rising interest rates are likely to add to the squeeze being felt by consumers. Although there are a few savings to be made, for example, the reduced need to purchase covid tests when travelling between countries, this has been more than offset by increases in fuel, living costs and interest rates.
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