Interest rates will not be rising this month, as the Bank of England’s Monetary Policy Committee at its meeting today voted to maintain base rate at 0.5%. This is the 65th month in a row that the Bank has kept rates at a record low, but many are predicting this trend will reverse soon.
Last summer the then newly-appointed Bank governor Mark Carney introduced forward guidance to give the market, savers and borrowers some stability and predictability to the Bank’s rate plans.
However, the threshold of low inflation, and low unemployment were hit years sooner than expected and Carney was forced to abandon so prescriptive a plan. He has subsequently indicated that interest rates will rise in the next 12 months, and the rise will be a slow and steady trajectory. In June, Carney indicated that interest rates would rise at the end of this year, with economists predicting rises of 25 basis points every three months.
Carney suggested that the “new normal” for interest rates would be 2.5%, like to be reached by early 2017. Before the dramatic cut to 0.5% in March 2009, 12 months previously Bank of England set base rate at 5.25%, but Carney said that too much had changed for rates to return to this level.
According to Hargreaves Lansdown’s Investor Confidence Index, nine out of 10 investors expect interest rate rises in the next year, with a third expecting a rise in the next 6 months.
Neil Lovatt, director of financial products at Scottish Friendly, said he expected any rate rises will be small because we are likely to remain in a low interest rate environment – the landscape has changed from what it was before.
“Nowadays very small rises in interest rates will have a significant effect on what is still a fragile economy,” he said.
"Any savers thinking that the 'good old days' of high interest rates will return are going to be sorely disappointed and the sooner we adapt to this environment the better."
