Mortgage rates hit a six-month high this week and the forecast is for 4.5% to be the new normal by the end of 2015, but what’s driving it and how will it affect investors and the economy overall?

Mike Fratantoni, chief economist for the Mortgage Bankers Association, says a combination of domestic and global factors is driving this move.

“Although US economic growth was weak in the first quarter, the job market continued to improve, with average monthly job growth above 200,000 and job openings at a record level,” he said. “We are beginning to see a pickup in wage growth as well. The market is now anticipating a rate increase from the Fed in September.”

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(Source: MBA)

Taking the global perspective, Fratantoni said the biggest driver has been improving conditions in Europe, most importantly in Germany. The weaker euro has benefitted the export-dependent German economy, and there are even signs that inflation is increasing in Europe, whereas many had feared the region was sliding towards deflation.

“The European Central Bank took aggressive action with their version of QE, and it seems to be working,” he said. “German 10-year rates have increased from an unbelievably low level, 0.05 percent at one point, to a more sustainable level near 1%. U.S. rates have moved up in tandem, with the spread between the two reflecting the stronger growth prospects in the U.S.

“Our forecast has mortgage rates increasing to about 4.5% by the end of 2015, and rising further next year,” Fratantoni said.