Skip to the content

Menu

How will interest rates progress in 2016?

Interest rates

​As 2016 gets underway, speculation has begun to arise around the progress of interest rates throughout the year ahead.
In recent weeks, reports have emerged predicting that interest rates will rise slightly in the UK over the next 12 months, while they are not expected to increase at all in other parts of Europe. Meanwhile, the actions of the Federal Reserve are anticipated to have an effect on interest rates in Asia.

So, what exactly is likely to happen to interest rates around the world over the course of 2016? We take a look below.

The UK

There are conflicting opinions as to what will most likely be the case for interest rates in the UK throughout 2016, with the general consensus in recent months being that there would be no rise until the final weeks of the year, or even January 2017.

However, various comments from the Monetary Policy Committee (MPC), dramatically falling oil prices and weaker-than-expected growth in the country's economy have led these hunches to change, with many now believing there will be no interest rate increase in Britain until early next year.

Despite this, some believe there could be not just one rise but, in fact, two over the course of 2016, indicating a significantly mixed outlook for the year ahead.

Speaking to the Telegraph, analyst Samuel Tombs of Pantheon Macroeconomics offered his own predictions for the state of UK interest rates during 2016.

"We still think that the MPC will need to raise interest rates twice this year to prevent inflation rebounding too sharply in 2017," he stated.

"May remains - just - the most likely date for the first hike, although we would not be surprised if the committee dithers a few months longer."

Although only time will tell what's next for UK interest rates, the common view is that they will indeed increase - it's just when that's the question.

Europe

Elsewhere in Europe, no dramatic changes to interest rates are predicted for the coming year - but in the ever-unpredictable world of finance, no one can ever be 100 per cent certain of what might happen.

In a policy meeting on January 21st, the European Central Bank's (ECB's) president Mario Draghi opted to keep interest rates unchanged at 0.05 per cent for the foreseeable future.

Mr Draghi stated that eurozone rates would "stay at present or lower levels for an extended period".

With little movement predicted with regards to the value of the euro in the coming months, this is not expected to change dramatically as 2016 continues to get underway.

The US

Over in the US, the situation is a little more complex, with any interest rate changes in the country having a knock-on effect on financial markets around the world.

Last year was a fairly quiet one for America's interest rates, although December 2015 saw the Federal Reserve increase rates for the first time in ten years, leading to speculation about what may happen over the year ahead.

However, it depends how inflation changes during the next 12 months. It has remained at a relatively low rate in recent years, but many believe an increase will occur in 2016, which in turn is highly likely to lead to a hike in interest rates.

Speaking to MarketWatch, chief economist at Amherst Pierpont Stephen Stanley said that inflation "is likely to be the single most important issue that determines the pace of Fed rate hikes in 2016".

Asia

Finally, interest rates in and around Asia are expected to increase during 2016, following the Federal Reserve's hike in the US. Singapore's financial market performance in particular is heavily influenced by what goes on in America, meaning it is more than likely that the country's interest rates will subsequently rise over the next 12 months.

It is not just international factors that will have an impact on Asia's interest rates though, with domestic influences also set to determine the progress of the region's rates this year.

One industry analyst, Jack Wang from Raffles Investment, explained: "For Indonesia, it's pretty much the concerns about inflation, which is pretty high, it can reach double digits. For Malaysia, it's more of an impact of low oil prices, as well as the reputation - the credit rating of the country."

"So really, I think the domestic factors will play a role. The macro environment has not been very favourable to them."

World view

Overall, it seems that global interest rates and the activity surrounding them remains fairly calm for now, with no dramatic fluctuations expected at the start of 2016 and just the US and Asia anticipating slight increases to their rates.
However, only time will tell what will happen as the year gets into full swing.