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BoE governor predicts 'new normal' for interest rates

POSTED: 1st August 2014
IN: General
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Currently at a historic low of 0.5 per cent, the UK base interest rate is likely to return to a "new normal" of around 2.5 per cent, according to the governor of the Bank of England (BoE).

Currently at a historic low of 0.5 per cent, the UK base interest rate is likely to return to a "new normal" of around 2.5 per cent, according to the governor of the Bank of England (BoE).undefined

Mark Carney told BBC Radio 4's Today programme that the rate could reach this level within three years, adding that a return to typical rates around the five per cent mark is unlikely in the foreseeable future.

Mr Carney stressed that, rather than placing too much emphasis on the BoE's monthly interest rate decisions, consumers and businesses should be looking at the medium-term picture.

He pointed out that this will have the greatest significance for everyone, from individuals taking out mortgages to company owners thinking about taking on new employees.

"The guidance we are giving is... the time will come to raise interest rates... but when we raise interest rates we expect to do so in a gradual and limited fashion," the BoE governor added.

There is a strong likelihood that the base interest rate will rise before the end of the year, which would be welcomed by the Institute of Directors (IoD).

The IoD said its chief economist James Sproule was 'breaking with the consensus' among business organisations by calling for an increase in rates, possibly as early as this autumn.

Mr Sproule acknowledged that the "ultra-loose" monetary policy adopted by the BoE over the past few years successfully mitigated the impact of the recession. However, in light of the ongoing recovery, he also argued that it will soon be time to take interest rates to a level where they can be an "effective economic lever".

"Ideally this rise in interest rates will be achieved gradually, starting in the autumn of 2014, with an aim of reaching a more normal level, perhaps three per cent, by autumn 2015," he added.

Some mortgage borrowers could see their repayments increase when the BoE decides to increase the base rate, while many savers will benefit through greater returns on their investments.

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