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Interest rates – is the Bank of England Playing a Dangerous Game

Interest rates - is the Bank of England Playing a Dangerous Game

Is it possible that the interest rate won’t increase until 2011? The UK economist at BNP Paribas, Alan Clarke, seems to think so.

Mr Clarke has said that he believes the interest rates probably won’t see an increase until late next year. He stated:

“The fact that they are doing quantitative easing is because they can’t cut interest rates, if they could cut interest rates they would.”

Clarke went on to add that if the UK was in a position where increasing interest rates was appropriate then the Monetary Policy Committee (MPC) of the Bank of England would do so.

The MPC voted on 7th January 2010 to maintain an interest rate of 0.5%. This certainly indicates that changes for the foreseeable future are extremely unlikely.

This could largely be due to the fact that a general election is going to be called in the spring. Consequently this leads to speculation that a new government will put additional spending cuts and tax increases in place. It would therefore be inadvisable for the Bank of England to increase interest rates with the impending introduction of more fiscal tightening.

The economic adviser to Deloitte, Roger Bootle, believes that it will be a very long time before the MPC are likely to withdraw the stimulus it has already provided. However, in a contrasting opinion Bootle added that markets expect to see an increase in interest rates of between 1.5 – 2% before the end of the year.

If it is the case that the Bank of England will not increase interest rates then the real fear is that inflation is likely to see an increase. Should inflation occur the UK is likely to see an increase in prices of goods, services and property, leading to:

1. Increase in the cost of living expenses.

2. Should interest rates remain low the value of any property you own may remain the same or decrease.

3. People will spend more, fuelled by the fear that as inflation increases the product/service will cost more in the future. This, in turn, heats the economy up even more – leading to spiralling inflation (so called because the situation spirals out of control).

4. From small businesses to large corporations – if any company has holding bonds, treasury notes, savings or shares they are likely to see deterioration in their value. As they become increasingly less valuable companies will rush to sell them which depreciates their value even more. As this happens the government are forced to increase interest rates to ensure businesses are able to sell them at all.

Related links:

Too dangerous to raise interest rates yet

Small businesses show resilience in fourth quarter

Small business costs to increase in 2010

Small businesses turn to their overdraft


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Discussion

4 thoughts on “Interest rates – is the Bank of England Playing a Dangerous Game

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