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Base rate will remain at 0.5% until unemployment levels reduce

August 7th, 2013

Contractors are expected to enjoy low interest rates for another 3 years, as Bank of England newcomer Mark Carney has promised that the base rate will remain stagnant until unemployment levels reduce to a provisional target of just seven per cent. Despite predictions that it could be 2016 before unemployment has reduced to this level, the new boss stated that he would not consider raising interest rates before this time.

Carney, who was hand-picked by George Osborne to replace Lord King as Bank of England Governor last month, expressed his hopes that ‘forward-guidance’ will help to reassure the public that rates will remain low for the foreseeable future, instilling confidence in households and businesses, and encouraging economic recovery.

However, although Carney confirmed that a renewed, broadening recovery is underway, the governor warned that this remains weak in comparison to historical standards. In his first major press conference in the UK, Carney described economic movements as the ‘slowest recovery output on record’, with high unemployment levels posing a particular concern. Carney said that there are a further one million people facing unemployment today than prior to the financial crisis, and many others who are in employment but do not have the option to work as much as they would like to.

The governor expects inflation will also remain at a stagnant level of 2.9% over the foreseeable future, which is squeezing household income as wages rises remain sluggish, increasing at approximately just half of that rate.

It is likely that Chancellor George Osborne hopes to strengthen Tory chances at the next election as record low borrowing costs between now and polling day in 2015 encourages rising house rises and the return of public optimism. However, whilst the prospect of low interest rates for at least another two years should delight borrowers, savers are expected to face even further aggravation after suffering from disappointing returns since March 2009, when rates hit a record low of 0.5%.

Whilst Carney’s recent forward guidance will no doubt be met with mixed reviews, the Bank of England warned that it is not immovable. The Bank issued warnings that the link with unemployment would be broken if inflation is expected to be 2.5% or above in the next 18 months to two years. The Bank also said that the link would be broken if there were concerns about sharp increases in inflation in the medium term.

The introduction of Carney’s forward guidance was welcomed by Osborne, who said in a letter to the governor ‘Given the exceptional economic challenges continuing to face the UK economy, I agree with you that forward guidance can play a useful role in enhancing the effectiveness of monetary policy and thereby supporting the recovery.'

Although there are an increasing number of factors which are indicative of a recovery which is picking up pace, it would appear the UK is yet to return to an economic boom, as Carney stated that ‘we are not at escape velocity right now’.

Experts have issued warnings the Bank could be forced to re-think its promise to keep rates stagnant whilst employment levels are low if the economy picks up sharply, and advised that rates may still rise sooner than expected, especially if inflation roars back.

Despite this, economists have advised that the Bank’s forward guidance was indicative that interest rates could remain stagnant until at least 2016, or possibly even 2017.

Article By: Taj Kang, Business Development Director at Contractor Mortgages Made Easy

Media Contact: Raman Kaur, Public Relations Manager

Tel: 01489 555 080

Email: media@contractormortgagesuk.com

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