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Timescale for interest rate increases remains uncertain

Timescale for interest rate increases remains uncertain

November 12th, 2015

Despite the strong predictions from leading economists and strong warnings from the Bank of England to the contrary, we have come no closer to an interest rate increases in 2015. Comments attributed to the governor of the Bank of England in March suggested that a gradual, but consistent pattern of interest rate rises was imminent. Yet eight months on, the timeframe for the introduction of rate increases remains unclear.

Mr Carney has, with the support of certain key member of the Monetary Policy Committee, continued to vaunt the merits of an early increase for long term stability. Yet, many economists and Bank of England members appear to be at odds with this view, as Andy Haldane, the chief economist for the BOE recently stated, “the case for the UK raising interest rates is some way from being made and negative rates may be needed.” In light of these comments, it’s hard to see a seismic shift upwards in the near future.

It’s fair to say, the discussion is so muddled at present, that no industry expert appears to have the answer. Further uncertainty and pressures have been presented with the US Federal Reserve tentatively floating the notion of increases to interest rates, only to be put under firm pressure by the International Monetary Fund in September to halt such thoughts. The IMF further raised notes of caution in October, as the fund’s head of financial stability Jose Vinals told the Financial Times that the international community needed to take care when setting policies, so as to not topple the financial markets back into the pit of recession.

As such, talk of rate rises in the US is likely to lead to movement in 2016. While this would normally put pressure on the MPC to consider increasing the BOE base rate, other factors may stay the hand of Mr Carney. UK inflation has recently dropped back to a negative rate of -0.1 per cent, with the finger pointed to fuel and energy prices as the culprit. Additionally, core inflation continues to perform poorly, currently sitting at 1 per cent.

Some key MPC members have argued that despite these negative points, improvements in income levels suggest that the outlook is not so bleak, with wage inflation up to 2.8 per cent and rising. Unemployment figures are now at the lowest level recorded since the onset of the financial crisis in 2008, further supporting the view that improvements are evident.

The case for and against an increase seems finely balanced, but indications from Mr Carney last week add credence to the belief that we will not see an increase until early 2017. Although unemployment levels and gradual increases to income provide positivity, the poor performance of the UK gross domestic product, coupled with international economic uncertainty, support the view that movement anytime soon could push backwards the economic recovery. A move may come sooner than this, but the conversation will continue to take shape month by month from here on in.

Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy

Media Contact: Ratchelle Deary, Public Relations Manager

Tel: 01489 555 080

Email: ratchelle.deary@contractormortgagesuk.com

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