Interest Rates Maintained

by Mark Johnston

Interest rates have been at an all time low of 0.5 per cent since March 2009 and it is generally accepted that rates will rise but the questions on everyone’s lips are when and by how much will it rise. 

Inflation is a key milestone to use to answer the “when” question.  The current inflation figures are about double what the Government had predicted and budgeted for.  The likelihood is that inflation will remain fairly stagnant for the next quarter and that interest rates will slowly rise as the inflation figures decrease.

Market experts have been suggesting that the Bank of England should raise interest rates sooner rather than later to ensure consumers have a fighting chance against the general higher cost of living which is eroding the consumers spending power.  Many insiders have advised that if the Bank of England’s Monetary Policy Committee (MPC) hold off much longer they run the risk of fatally damaging the UK’s fragile economic recovery, especially since there was a general retraction in the economy during the final quarter of last year. 

The MPC have a hawkish few who are vying for a rate rise but are continually out voted when it counts.  Three members of the nine strong committee are still in favour of a immediate rise in the 0.5 per cent base rate. 

When, this is the next question on everyone’s lips now.  Well, the BBC recently asked 22 economists which month they thought interest rates were likely to change in.  “In which month do you think the MPC will raise interest rates?”  August was the most popular choice with 14 votes, May was next with 4 votes and June, July, November and February were all voted by one economist each.

An interesting and quite key question was asked next, “What level do you think interest rates will be at by the end of the year?”  Most, 12 out of the 22 said that they thought that the interest rates at the end of the year would be 1 per cent with only 6 estimating a rate of 1.25 per cent by December 2011.  Stuart Green from HSBC Bank plc said that he thought the rate would still be at 0.5 per cent at the end of the year.

Deutsche Bank’s, George Buckley estimates that the interest rate would be at 1 per cent by the end of the year and went on to say that the economy isn’t so weak that it wouldn’t sustain a rate rise of 0.5 per cent.  “We’re also forecasting higher rates because inflation’s very high. The Bank still thinks it’s going to go up over the next few months.”  “If you raise interest rates, that will help combat inflation”.  He went on to say that historically the BoE has changed rates on the same months that the inflation reports come out.  This is May, August, November and February so there is a good to probable chance that rates will be raised in August.

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