UK interest rate expectations at lowest levels ever

Here’s how weird things are getting: in Denmark there are now some mortgages with negative interest rates. In other words, banks are paying customers to lend them money.

Odd things like this happen when you cut interest rates below zero, as they did in Copenhagen the other week. This Danish episode was a direct consequence of the European Central Bank’s decision to begin quantitative easing – since the krone is pegged directly to the euro.

You might have thought that the UK might have been isolated from such oddities, given it has its own, free-floating currency, but a look at market expectations for interest rates might suggest otherwise.

According to Bank of England figures, investors, who were, not all that long ago, expecting borrowing costs to start rising this spring, now don’t expect the first increase in UK rates until next summer – around May or June.

As you can see, back in 2009, markets were expecting the UK interest rate to rise very quickly, and head all the way back up to 4.5% by early 2013. Those expectations have steadily come down as time has gone on – and the date of the first expected hike has been notched gradually further off into the distance.

Most startling of all is the expectation for where the UK borrowing rate will be in five years’ time. According to these market projections, even 60 months from now, in early 2020, official Bank of England interest rates will be only 1.2%.

That is unprecedented – and if you’re one of those people who worry about the “Japanification” of the world economy, this is a particularly striking datapoint.