No Hurry To Raise UK Interest Rates

21.05.14

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As the UK economy improves and house prices rise, there has been much discussion about how soon the Bank of England will raise it base interest rate. The Bank has however now pretty much quashed speculation that we could see an increase this year.

As the UK economy improves and house prices rise, there has been much discussion about how soon the Bank of England will raise it base interest rate. The Bank has however now pretty much quashed speculation that we could see an increase this year.

Bank of England Governor, Mark Carney, previously said that the Bank would “absolutely” be prepared to raise rates before next May’s general election. Analysts have since observed that the recent strength in the UK economy could lead to an earlier rise. In the lead up to the Bank’s quarterly Inflation Report on 14th May, there were reports that the Bank would endorse market expectations of a hike in the first quarter of next year.

However the Bank of England instead reiterated that it is in no rush to raise rates. At the press conference Mr Carney said that the Bank Rate will remain low for a while.

He cautioned: “Amidst the excitement that output is close to regaining its pre-crisis level, we should not forget that the economy has only just begun to head back to normal”.

Although the economy has been growing, there is still plenty of “spare capacity” for rates to stay low. In other words, there is enough room for the economy to expand without increasing consumer prices.

The good news for savers is that Mr Carney did acknowledge that the economy has “edged closer” to the point where the Bank Rate will need to rise.

He did add, though, that when this does happen, increases will be gradual and limited, so rates “may stay at historically low levels for some time”.

According to the Inflation Report, economic growth will become broader-based and more sustainable, as it moves from a recovery supported by household spending to an expansion sustained by business investment.

The Bank upgraded its growth forecast for next year to 2.9%; up from its 2.7% forecast in February.

The growth forecast for this year remains 3.4% – the same level seen in 2007 before the financial crisis.

The Bank also upgraded its forecasts on unemployment. Last year it expected the unemployment rate to remain above 7% for some time, but it now predicts that it will fall to 5.9% in two years. It was 6.8% over the first quarter of this year, down from 7.2%.

There had been discussion among analysts that the Bank of England could use interest rate hikes to cool the housing market.

Mr Carney however said this would be the last line of defence, and that the Bank’s Financial Policy Committee has a wide range of tools it can use in a graduated and proportionate way, to reduce risks emanating from the housing market.

The Governor concluded his press conference speech with a sporting analogy:

Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement, but not the ultimate goal. The real tournament is just beginning and its prize is a strong, sustained and balanced expansion. Across the Bank we are setting policy in order to help win that prize for the good of the people of the United Kingdom.

Of course, high street and offshore banks set their own interest rates on their savings and deposit accounts. A report in The Telegraph on 12th May disclosed that UK banks and building societies have reduced interest paid to savers by almost £1 billion over the last year.

Cuts have been made to both old and new savings accounts. In March 2013 easy-access savings accounts were paying an average interest of 1.04%. By March 2014 this has fallen to 0.75%.

Simon Rose of the campaign group Save Our Savers commented:

These calculations are truly shocking, and show there is nowhere for savers to turn. The Government might have had a 'Budget for savers' but the elephant in the room is interest rates, which have been left so low that many people who rely on the returns from savings are struggling to maintain living standards.”

As to when the Bank Rate will finally start to rise, we can expect much more discussion over the coming months. Mr Carney himself commented that the exact timing will be the subject of considerable speculation and interest, but that the ultimate answer will depend on the evolution of the economy.

How much of your investible capital you hold in cash should depend on your personal circumstances, aims and risk tolerance – and not on speculation of what interest rates may or may not do. Remember that keeping too much in cash carries the risk of losing spending power over time. You need a clear and objective assessment of your attitude to risk to establish the savings and investment strategy that suits you best, and should take professional guidance on this.

16 May 2014

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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