Base Rate Rise Delayed

by Mark Johnston

Savers will have to wait a little longer to see any increase in the interest on their savings but what is bad news for them is great news for borrowers as the Bank of England base rate is predicted to remain low for some time to come.

Chief economist at the US investment bank Citi Group has said that the Bank of England will delay increasing the interest rate until after 2012, more than likely into 2013.  This means that the base rate will remain at 0.5 per cent until then. 

Member employed by the BoE are divided as to when and how high rates should rise but they are all fairly certain that the Base Rate will need to rise to counteract potential soaring inflation figures.

The Inflation Report, delivered in February, noted that the inflation forecast peaked at 4.5 per cent in the three months leading up to September.  However, in the minutes taken during the recent Monetary Policy Committee, it became clear that they were issuing caution and warned that “a significant risk that inflation would exceed 5 per cent in the near term”. 

This warning tends to convince more of the 9 member strong Monetary Policy Committee that the time to raise rates is coming soon.  Furthermore, minutes from the meeting indicated that there were three members who wanted to raise the base rate in February and the meeting notes suggest that further members are ready to join this way of thinking.  “Others thought that, given further upwards revisions to the near-term outlook for inflation, the case for an increase in Bank Rate had strengthened in recent months.”

The delay in rising rates will come as good news to mortgage holders and next week the Bank of England will release the minutes from their most recent Monetary Policy Committee meeting.  Market experts are all commenting that the latest trend will be to keep the rise until the recovery within the UK is fully entrenched. 

Paul Mortimer-Lee from BNP Paribas said “The Bank of England will not raise interest rates for the next two years in spite of a 20-year high on the UK target inflation measure, possibly rising to 6% on the RPI.”

Adding “The combination of the all too slow economy with high levels of unemployment keeping wage rises down, negates the key purposes for any interest rate hike. Predictions are that the UK economic prospects remain gloomy, with consumers squeezed by low pay increases but fast inflation.”

“These diverging signals partly reflect temporary factors, but the big picture for the UK economy is of a marked rebalancing towards net trade amidst strong external cost pressures and supply-side deterioration. The result is likely to be a modest recovery, led by exports, with a lasting inflation overshoot,”

“We now expect rates to be 1.25% at end-2012 (2% previously), 2% at end-2013 (3% previously) and 2.75% at end-2014 (4% previously), with some catch-up thereafter,” he added.

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