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Will interest rates increase soon?

I have read a number of comments in recent days where various economic forecasters are providing their insight on where they think interest rates will be in the coming months.

Last week the British Chamber of Commerce commented that they believe the bank base rate will rise to 2.75% by the end of 2012. This is quite an aggressive forecast and is quite at odds with other bodies.  

Conversely the Ernst & Young Item Club still take the view that the base rate could remain at the current 0.5% level certainly until the end of 2011 and possibly throughout 2012 due to the overall weakness of the UK economy and this view appears to be shared by the majority of forecasters who regularly comment on this much debated subject.

The outgoing monetary policy committee member Andrew Sentence has been fairly critical of his former colleagues suggesting that the committee is losing credibility in not tackling inflation which is its primary mandate. The new MPC member is Ben Broadbent who will be attending his first monthly meeting in a few days and it will be interesting to see if he shares his predecessor’s more hawkish economic views.

Sentence had repeatedly voted for a base rate increase of 0.5% but the doves on the committee have continued to hold sway and with the austerity measures still not really impacting on most people as yet it seems less likely that the committee would instigate a change of policy at this stage when the economy still appears fairly weak and unbalanced.

Brian Murphy is Head of Lending at Mortgage Advice Bureau

National Mortgage Index – May 2011

Comments

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    Brian, While the UK government may find low interest rates appealing as they do not harm the calm of the average overleveraged prole, it is simply not in their gift to sustain them over the medium-long term.
    The UK government is in the position is spending more than it earns by a tune of £1 for every £4 every a month. What this means is that the government must every month borrow hundreds of millions from the international lending markets. The reason we have these low interest rates is because the international lenders permit it. If inflation persists the lenders may feel they are being defaulted on, and refuse to lend at the coupon offered. The moment the BoE fails to get a tranche of gilts away it will have to hike interest rates, the alternative would be massive and panicked cuts to government spending, or simply not paying the wages that month.

    Now it’s true that no one can be sure when this will occur, but please don’t mistake this process for a choice of when and how. It is a matter of reaction and needs.

    • 15 June 2011 11:14 AM
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