According to the Bank of England’s Deputy Governor for Monetary Policy, Sir Charlie Bean, interest rates could return to the pre-recession level of 5 per cent in “the very long term”.
Sir Charlie believes it reasonable to assume that rates would return to this level in 10 years or more but added that this is “probably quite a long way down the road”.
Interest rates were cut when the financial crisis hit in 2007 and have remained at the record low of 0.5 per cent since March 2009, although the Bank’s Governor, Mark Carney, has suggested that they could rise to a “new normal” of 2.5 per cent by 2017, adding that any interest rise in the coming years would be done in a “gradual and limited fashion”.
According to Sir Charlie, who steps down from his position today (June 30), rates rising to 2.5 per cent over the next three years appeared to be a “broadly sensible judgement”, adding that it was rational to expect them to rise to 5 per cent within a decade.
A rise would benefit savers and cautious investors, who have been in receipt of paltry returns since the rate hit 0.5 per cent, but could spell trouble for homeowners, which has led the bank to propose that prospective mortgage borrowers be tested to see whether they could withstand a rate rise to 3 per cent.
The rumours around interest rates have now begun to impact on homeowners’ decisions, according to figures from the Bank, which show that while more than a third of all mortgage debt is on fixed-rate deals, this rises to 86 per cent for loans signed in the first three months of this year.