Interest rates to rise?

Many lenders withdrew and re-priced some of their fixed rate products recently, perhaps in anticipation of a sooner-rather-than-later rise in interest rates.

The Bank of England base rate has been held at the historic low of 0.5% for the 22nd consecutive month which continues to provide welcome respite for borrowers whilst the economy maintains its slow recovery from the deepest recession since World War II.

However, it’s not just the voices of angry savers trying to force the collective arms of the Bank of Englands Monetary Policy Committee (MPC) but the consistently well-above-target (2%) rate of inflation, which latest figures put at 3.7%. This is before the effects of the recent hike in VAT to 20% make it through to the inflation figures in months ahead.

These rather alarming and continuing figures could dash governor of the Bank of England, Mervyn King, hopes for a slow-down in the rate of inflation and bring forward an interest rate rise.

But let’s not forget that the backdrop for this whole scenario is still that of a very weak economy and although growing at a respectable rate there was a lot of ground lost to the recession, so there is still some way to go before we are ‘out of the woods’. Unemployment is still high and not showing signs of easing yet, growth in wage rises is also slow meaning people may have to tighten their budgets in light of the VAT rise. All this could have the effect on inflation the Governor is hoping for.

It’s also likely that any rise in the base rate would be a ‘token’ rise and even then, such a rise could create a knee-jerk over-reaction in the form of worried borrowers further tightening their belts and spending less on the high-street, damaging growth.

There are arguments for and against on both sides, all with equally valid points. All we can do is use those three words economies fear most ‘wait and see’.

Comments are closed.