Interest rates in the UK have remained as low as 0.5 per cent for six years. The Bank of England first cut the rate to its current level in March 2009, in a bid to boost the economy during the credit crunch.
Recent economic growth has led to speculation that the Bank has plans to raise the cost of borrowing money in the near future. However, inflation is very low, at 0.3 per cent, and so the Bank’s policy makers are unlikely to increase the interest rate for some time yet.
Inflation is likely to remain low and may even turn negative in the late spring, chiefly because the cost of oil has almost halved since last summer.
Bank of England governor, Mark Carney, has spoken of reducing interest rates still further if prices fail to rise over the coming months. He predicts that they will start to increase by the end of this year.
The problem with falling prices is that consumers often put off buying expensive goods in the hope that prices will fall further. Seventy per cent of the British economy is dependent on consumer activity and so a slowdown in sales inevitably has a dramatic effect on economic growth.
Senior economic advisor, Martin Beck of the EY Item Club, believes that the next interest rate rise will not come until early 2016, when inflation should be above 1 per cent and likely to reach the Bank’s target of 2 per cent.
Chief economist at the British Chambers of Commerce, David Kern, called on the Bank to state its intentions clearly, adding that many British exporters are already suffering because the pound is so strong against the euro and that higher interest rates would only worsen the situation. Should the Bank make it clear that it has no plans to raise interest rates until 2016, confidence would increase, he said.
