Interest rates will stay lower for longer, the fiscal watchdog predicted yesterday, because the Bank of England is now not expected to tighten monetary policy until well into 2015.
When it last made its forecasts in March, the Office for Budget Responsibility (OBR) predicted the average mortgage interest rate would dip below three per cent in early 2015, then steadily rise to more than four per cent in 2019. Now it expects rates will keep falling to a low of around 2.6 per cent in 2016-17.
By 2020 rates will still only stand just above the three per cent mark.
“House prices have continued to accelerate since our March forecast, with year-on-year growth reaching 11.7 per cent in the third quarter of 2014, compared to our March forecast of 9.2 per cent,” the OBR’s report said. “In total, house prices are expected to rise by 31.4 per cent by the first quarter of 2020.”
That represents a hike of 5.9 per cent compared with earlier forecasts.
Lower interest rates will help boost house prices and economic growth, but are also a sign that the Bank of England is worried about the strength of the recovery.