Interest rate hike looks unlikely before end of year

IN: General

Bank of England suggests interest rates will not rise in immediate future.


After much speculation that the Bank of England (BoE) was set to increase interest rates in the coming months, it now seems unlikely that a rise will be announced before the end of the year.

The BoE said wage growth has been much slower than expected, meaning it has cut its forecast for pay increases this year by half, from 2.5 per cent to 1.25 per cent.

Combined with the fact that there is still spare capacity in the UK economy - despite a fall to one per cent of gross domestic product - this issue reduces the likelihood of an interest rate rise. This is in spite of falling unemployment and ongoing economic growth.

BoE governor Mark Carney maintained his stance of refusing to comment on when interest rates could go up. However, he did note that the suitable future level of interest is not likely to be drastically different to what it is today, owing to economic headwinds.

"Moreover, even when these headwinds have fully abated, the appropriate level of Bank rate is likely to remain materially below its pre-crisis average for some time," he added.

Despite all these factors, Mr Carney acknowledged that interest rates can be expected to rise as the recovery progresses in the long term.

This has been an issue of much debate between industry groups and commentators, with the British Chambers of Commerce (BCC) warning that a premature hike could put the economic resurgence at risk.

BCC chief economist David Kern welcomed the reassurance that, when rates do start to rise, they will do so slowly.

"We must nurture the business confidence we are seeing at present by giving businesses the security of working in a low interest rate environment for the foreseeable future," he said.

The BoE's indications that interest will remain relatively low in the long term will reassure companies and also encourage higher investment, according to professional services firm KPMG.

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