The Bank of England party line of no increase from a 0.5 per cent rate until mid-2015 has been updated. Mark Carney, Governor of the Bank of England, gave the clearest indication yet in his Mansion House speech on June 12 that an interest rate rise is on the cards, saying the first increase “could happen sooner than markets currently expect”.
This would be very welcome news for all those savers, often elderly people in retirement, who have anxiously watched rates sink during the downturn. Not such welcome news for those with large mortgages who have benefited from an unprecedented period of lower monthly repayments.
The recent surge in house prices and the sharp increase in mortgage lending under the Government’s ‘Help to Buy’ scheme have given rise to talk of a ‘housing bubble’, and although the Bank of England has made it clear that it will use measures other than interest rate hikes to try and cool the housing market, raising rates would dampen demand.
UK interest rates are influenced by events far beyond these shores. The European Central Bank recently introduced negative interest rates. Other factors that could change the economic landscape include the conflict between Russia and the Ukraine and continuing concerns about China’s ability to sustain high levels of growth and service debt.
But closer to home, there’s much good news on the UK economy – unemployment is falling, the pace of the recovery is quickening, there’s increased optimism abroad alongside an upward revision of UK growth prospects for the remainder of 2014.
A rise may arrive sooner to stall higher rates in the future. Such a move would fit the scenario described by outgoing Monetary Policy Committee member, Charlie Bean, where 3 per cent could be the new normal for base rate. The Bank has also said it is unlikely that we’ll see a return to the 5 per cent level seen as normal in the years before the financial crisis.
As ever, it’s a case of ‘watch this space’ as we head towards 2015.
Simply Money; Summer edition 2014
