UK Interest Rate: When will it be increased?

When will the Bank of England’s Governor Mark Carney Raise the UK Interest Rate ?

UK Interest Rate: Mark Carney, Bank of England
Bank of England Governor Mark Carney

 

Today Bank of England Governor Mark Carney will announce a decision on the UK interest rate after concluding a two day policy meeting. As with previous months many expected the rate to remain flat at 0.5%, as was the case. However, for the first time since the BOE decided to drop its benchmark to a record-low five years ago, there are said to be noises of dissent coming from members of the monetary policy committee. With a consistently improving economy and half a decade of a reduced interest rate, the question remains: When will the interest rate rise?

With both the Fed and the ECB expected to keep interest rates low for the foreseeable future, the UK’s impressive rate and economic growth would suggest that the Bank of England will be first to raise it’s interest rate. Yet Carney seems resilient. In July the BOE governor claimed that the economy is “starting to head back to normal” and “[the] bank rate will need to start to rise to achieve the inflation target”. These may have been signs of a change of tack from a man who regularly supported the deferral of an interest rate rise. This could have been caused by impressive figures over the first two quarters of the year, or increasing pressure from his Bank of England peers.

One thing that does seem to be standing in the way of a rate hike is the UK’s (most noteably London’s) rapid spike in housing prices over the past 12 months – said to have reached a 10.2% rise. Although we have seen the increase slow over recent months, there is no doubt that demand for property is high and that supply of new houses is limited, to say the least. With this in mind Carney rightly claimed that, ‘History shows that the British people do everything they can to pay their mortgages”. The implication of the statement being that an interest rise would, inevitably, increase mortgage repayments, forcing home-owners to cut back in order to fulfil their fiscal duties. This in itself could have a detrimental effect on the seemingly solid UK economy as per Carney’s statement, “[honouring mortgage repayments] means cutting back deeply on expenditures when the unexpected happens. If a lot of people are highly indebted, that could tip the economy into recession.”

In fact, real wages may be the ultimate problem restricting the Bank of England from approving a rate hike. Unemployment is at a healthy 6.5% – short of the 7% target Carney had set to be the trigger for a rate increase. However, there still remains an issue with regular pay. Although salaries are increasing at an annual rate of 0.7%, this is almost a third of the rate of inflation (1.9%). This is a worrying implication as it essentially suggests that goods and services are increasing in price at a significantly faster rate than your pay is increasing. When you consider this, it is more understandable that Governor Carney seems reticent to increase interest rates.

UK Interest Rate: House price income ratio graph
UK housing prices to income ratio has risen

When will the rate rise?

With economic growth in the UK set to surpass 3% this year the general consensus is that rates will rise shortly afterwards. Many are predicting Q1 of 2015 as a reasonable yardstick. In fact, the Bank of England has specifically tried to downplay hopes of any sort of change occurring in 2014. The main concern amongst policy makers and analysts is the massive disparity between house prices & inflation and weak wages. That being the case, It is difficult to see how the BOE could conceivably increase rates while this disparity exists – there is a need for policy makers to encourage companies to be more generous with their wage structure, now that they have had many consecutive months of growth with which to recoup their post-recession losses.

Fixing this wage issue is made all the more important when related to house prices in a recent report. A thinktank speculated that even if rates are raised by just a quarter of a percent that around one million households could be in “debt peril” by 2018. If the several factors aren’t all brought onto a more even keel there is a chance we could see underpaid people, living in overpriced houses and having to cope with an unbalanced increase in the cost of living; all of which could erase the good progress the UK economy has made since the recession.

So For the rest of this year we can expect inflation to remain flat at 0.5%. That should mean that – short of major political events (probably involving Russia, the U.S. or the middle East) – we can expect to see a continued growth in UK economy. However, An early 2015 interest rate raise, without appropriate measures and consideration being taken to combat low wages and high house prices, could lead to several markets (domestically and internationally) seeing a dramatic and protracted slump.

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Providing market news and insights to support your trades, Spread Co is a leading online provider of Contracts for Difference (CFDs), Spread Betting and Forex. Trade thousands of global markets including indices, equities, commodities and currency pairs with tight, fixed spreads, low margins and low trading costs. Visit www.spreadco.com for more information. Leveraged products carry risk.

Spread Co

Providing market news and insights to support your trades, Spread Co is a leading online provider of Contracts for Difference (CFDs), Spread Betting and Forex. Trade thousands of global markets including indices, equities, commodities and currency pairs with tight, fixed spreads, low margins and low trading costs. Visit www.spreadco.com for more information. Leveraged products carry risk.

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