Interest Rate Rise Tipped For Next May

Interest rates are set to rise for the first time in nearly a decade, possibly next year.

The Bank of England base rate was reduced from 5.75% in 2007, to a record low level of 0.5% by 2009 and has remained there since.

That means nearly two million people in this country have never experienced a rate rise.

Now (NYSE: DNOW - news) economists at RBC (Other OTC: RBCI - news) and Berenberg are forecasting a small rise in May, while futures contracts suggest an increase could be delayed until the end of the year, or even 2017.

So far, sluggish wage growth has helped push the hike back, despite guidance from Bank of England Governor Mark Carney that the UK should expect the cost of borrowing to rise soon.

The first hike is likely to be small - just 0.25%, bringing the base rate to three-quarters of a percent.

Kallum Pickering, an economist at Berenberg, said a rate rise is unlikely to cause a wave of mortgage defaults.

"I think it's more likely that people with high loan-to-value mortgages find that they can make their payments but can't spend on other goods and services," he said.

"That is potentially dangerous for the economy too."

At the same time personal borrowing such as loans, overdrafts and credit card debt is rising rapidly.

Personal (LSE: PGH.L - news) debt is again reaching the same level as before the financial crash.

According to research by PwC, there will be an average of £10,000 of debt for every household in the UK by the end of 2016.

This may be partly because consumer borrowing has not been restricted like mortgage lending in the wake of the collapse.

Behavioural economist Sotiris Georganas, from City University, studies how our decisions form financial patterns.

He says it is not just the low cost of money in recent years that has contributed to higher debt levels, but that borrowers have become accustomed to the availability of loans.

"People expect liquidity to be there."