Record low interest rates set to stay down, for now

The Bank of England’s indications that interest rates are unlikely to grow this year provide respite for borrowers, but only in the short term.

The past 12 months has seen strong economic growth and a drop in unemployment figures, but the Bank has signalled that it is not yet ready to boost record low interest rates.

In the Bank’s regular inflation press conference last week, Governor Mark Carney claimed the UK economy was still in its “qualifying stages,” noting that there was still spare capacity to use up before interest rates would be increased from their current level of 0.5% – held since March 2009.

While the Office of National Statistics’ latest inflation report showed a rate rise in April to 1.8% from 1.6% in March, the first inflation increase for 10 months, unemployment declined by a further 133,000 in the three months to March, down to 6.8%.

However, it seems the Bank is progressing cautiously to avoid undermining a delicate recovery.

The market responded negatively to the announcement, with the value of Pound Sterling falling against other currencies. But the news is more positive for maintaining customer confidence, especially among mortgage holders concerned by the prospect of a sharp rise in the cost of their borrowing.

City analysts remain confident that rates will be bolstered from April next year, leaving some politicians, especially the Conservatives, cautious as to the potential impact of such changes just a month before the next general election.

Rob Wood, chief UK economist at Berenberg, told the Guardian: “Our interpretation is that the rate setters are resisting the data strength as much they can. They seem keen to resist a hike this year. But, with growth running strong in their forecast, surveys showing no signs of growth slowing and unemployment close to 6% by the end of 2015, delaying that hike beyond the first quarter of 2015 would be untenable, in our view.”

Think tank Resolution Foundation warns mortgage holders to take full advantage of the low interest rates before the inevitable rise, or face being among the quarter of all mortgage owners unable to make their payments.

The market expectations of the rate surging from 0.5% to 3% by 2018 would leave over two million mortgagors forced to spend more than a third of their post-tax income on mortgage repayments, according to the body.

“There is still a window of opportunity to think creatively about the best way of reducing the risk to this vulnerable group while we still have ultra-low interest rates,” said Matthew Whittaker, chief economist at the Resolution Foundation.

“But that era is coming to an end relatively soon and the legacy of easy credit and the associated debt-overhang will have to be reckoned with. Borrowers, however, may not be the only ones to suffer from the proposed interest rates rise.”

According to economics commentator Emma Wall, from the Morning Star, a rates rise may see savers lose out.
“Although in theory an interest rate rise is good for savers, the reality is not as simple. Since the credit crisis the savings rate has been falling meaning we are saving less of our wages. As well as saving less, the nation’s financial obligations in the form of mortgages and credit card payments have fallen. Debt rates have been kept low – temporarily reduced by record low interest rates, making five-year fixed rate mortgages with a rate of 2% the norm.  However, when the Bank of England is forced to finally raise rates, households across the UK will feel the hit – and an extra percentage point interest offered on their savings will be of no consequence.”

If you like this article maybe have a read of this one, on the property price boom the UK is experencing.

Jermaine Haughton is a journalist and digital media professional.