The base rate of interest in the UK remains at 0.5%, an all time low. The cautionary note came from the notes to the last MPC meeting which showed 2 of the panel voting for a rise, this is the first real split in opinion for some time. So does this mean interest rates are on the way up?
The X Factor
OK, so we are not talking Saturday night TV, poor cover versions and disillusioned singers, we are talking about the factors that sit externally that make the future of interest rates even less predictable than a TV talent show.
The main factors that come into play are;
- The Bank of England has cut it’s wage growth forecast by 50%. This means they expect wages to rise slower or even stagnate, so less free cash in the economy and less pressure on inflation
- The EU has declared and economic war on Russia. With deeper sanctions due and trade restrictions coming the other way then the Eurozone will be hit, the UK will not be immune either. The European Central Bank have already issued a cautionary note that new sanctions will negatively impact on an already fragile Eurozone
- The French economy is hitting flatline levels, no real growth for a prolonged period and whilst technically not in recession they are not technically out of it either
- Deflation is evident in Spain, Portugal and Greece. For many years deflation was a text book only term, potentially more damaging than inflation. The real problem comes if further bailouts of the banks in these countries is required
If you add into all the above a few Middle East problems and a hiccup across the Atlantic and you suddenly have a real mix of scenarios which nobody really knows how they will play out.
Where Do Interest Rates Go?
If you take the BofE Governor, Mark Carney, at his word then interest rates are linked to job creation and inflation. In reality the factors that influence those come from a much wider spectrum than just economics, the UK or Europe.
Interest rates themselves are little different from anything in life, that is if you don’t know what is happening then sometimes it is best to sit still and see what happens. Be prepared to make changes but only when you can best assess what is happening around you.
With this in mind it looks like interest rates could stay where they are a little longer yet, even with some discerning voices at the MPC.
By Dave Farmer
The comment above is based on research and forms an opinion only, please don’t treat it as an exact quote or advice. It isn’t… Dave Farmer is founder of Lime Consultancy, an award winning commercial finance specialist. Please contact us for more information and add your comments to the post via the box below.
If you want a copy of the MPC meeting minutes then download it – mpc1408, the minutes take you through everything that is discussed about the interest rate decision. Not light reading, but it takes all sorts…