UK Interest Rates

charlotte

Yesterday The Bank of England made the decision to hold UK interest rates at 0.5% for yet another month, and as a result, the record low interest rate era will continue for an even longer duration! The levels we see today have remained constant since the financial crisis, which is more than five years ago.

In contrast, last month Mark Carney shocked the markets by saying that “Even if the Bank of England does start edging interest rates up, before the end of 2014, we still expect them to only reach 1.25% by the end of 2015, 2.0% by the end of 2016 and 3.0% by the end of 2017.” This surprised many as until recently the interest rates in the UK were not expected to begin rising until after the General Election in May 2015. However and probably more notably, economic data published yesterday demonstrated weaker than expected house price appreciation.

In our opinion the market is looking for something that does not exist, and Mark Carney cannot say when he expects rates to rise because it is not that easy. Data sets change daily and therefore the markets rise and fall based on assumptions which are not static.

Furthermore it is worth remembering why central banks raise and lower interest rates; Interest rates are controlled by central banks and fluctuate to control money supply, and consequently take money out of our pockets due to mortgage rates rising and falling. This therefore affects demand and as a result will have a lower effect on inflation, but only the right type of inflation.

They are raised when the demand needs to be lowered, and money supply reduced, and lowered when money supply eases and demand increased. The result is that we all have more or less surplus money to spend on the high street, and as a result more or less money will be circulating in the economy.

Therefore based on the above data, and due to the non-existing inflation risk, especially with a rising sterling that will create deflationary pressures; there is no real conclusion as to when rates will rise and it is our expectation it will be when we have wage inflation and when there is some consumer inflation and we do not have either today.