The asset manager said last February, the market priced the three-month London interbank offered rate (Libor) at 1.76% by this December, suggesting four 25bp rate increases this year.
However, things have changed said TwentyFour Asset Management with the market pricing three-month Libor at 0.97% by the year-end, fixing at 0.82%, just two-thirds of one interest rate rise.
This means markets expect the next full interest rate rise in March 2012, it said.
Howard Archer, chief European and UK economist for IHS Global Insight, said that its forecast is for a base rate rise in November, but that there’s a “real and increasing likelihood” that rates will rise in March next year.
He said: “Today the Office for National Statistics has reported poor retail sales figures which have made the likelihood of a base rate hike less likely in Q3.
“Declining house prices and a spike in jobless claims has made it very probable that the Bank of England will raise rates next year.”
Mark Holman, managing partner at TwentyFour Asset Management, said that once rates start rising, it does not necessarily mean a rise in mortgage default rates.
He highlighted that default rates are running very low, with one in 300 mortgages going into default last year.
He said: “Clearly, low interest rates have aided people’s ability to pay and have helped push this number lower.
“However, looking back in time, the highest recorded default rate on record in the UK was back in 1992 at 0.76%. That is still a low number, especially when you consider that mortgage rates were in the teens that year.
“Even throughout the heady rate years of the mid ’70s and ’80s, the default rate remained fairly steady at about 0.5%.
“The reason for this is that whilst a rate hike will certainly increase the cost of some mortgages and inevitably arrears may increase, the real impact is on affordability rather than causing an inability to pay.”
He added that when multiple rates hikes were expected in February this year, mortgage borrowers focused on paying off their capital.
“Back in February, when multiple rate hikes were expected, we saw a marked spike up in mortgage prepayments as sensible borrowers sought to reduce their debt burden before the pain of higher rates. British borrowers may be smarter than we are giving them credit for,” he said.
