Interest rates likely to remain unchanged

 

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Photo Credit: SalFalko via Compfight cc

 

One of the key indicators of a true return to positive economic growth will be an increase in the Bank of England’s base rate of interest, which is used as the central reference point for lending on loans and mortgages nationwide.


 

Historically, the base rate has averaged around 5.5% since the inception of the Monetary Policy Committee, an independent panel of Bank and government representatives and economists intended to set the rate at the most economically sound level, without being biased by politics.

 

But since the onset of the recession, the base rate has remained unchanged at just 0.5% since March 2009, following a precipitous drop from itshigh pointof 5.75%, reached in July-November 2007.

 

A low base rate encourages borrowing, effectively injecting more cash into a struggling economy, whereas a high base rate is more beneficial to savers – meaning in terms of interest rates, if not in the economy as a whole, a recession is actually beneficial for borrowers and detrimental to savers.

 

For those relying on borrowing to see them through the continued economic turbulence, the prospect of a rise in interest rates is likely to be a worrying one; but a newly published BBC survey of economists used by HM Treasury suggests there is little fear of that happening during the coming 12 months.

 

The broadcaster found 93% of 28 economists expect the base rate to remain at 0.5% until at least the end of 2014, and the majority expect no change in the first half of 2015 either.

 

Two thirds expect to see wage growth outpace inflation during 2014, while over two fifths predict that unemployment, currently at 7.4%, will drop to 7% or less by the end of the year.

 

And former MPC member Kate Barker says these other measures are potentially more important markers for economic performance.

 

She told the BBC: “The real question for the economy this year is not just about interest rates. It’s actually about what is going to happen to productivity; if we see productivity start to recover, we could see wages pick up quite a bit without any damage to inflation – so there are more things to look at, other than employment.”

 

For all households and businesses, however, a stable base rate provides some long-term confidence about financial circumstances, and the present historically low rate of just 0.5% makes it a fairly welcoming climate for borrowers of all types.

 

http://www.bbc.co.uk/news/business-25561477

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