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Interest rates - will they ever rise?

Posted on 25 Sep 2015 by Chris Torney

The Bank of England base rate has been stuck at an all-time low of 0.5% for almost six-and-a-half years now and the Bank has not actually raised rates for more than eight years.

But whenever the prospect of a rate hike appears to be just around the corner, events conspire to push it into the distance. With the UK economy returning to something like rude health over recent months, the Bank’s governor Mark Carney suggested earlier in the summer that the first rate rise could take place around the end of 2015.

The impact of China

But since late August, the picture has changed dramatically, with many analysts now suggesting that the first hike should not be expected until nearly 2017. The Bank of England’s chief economist Andy Haldane has even suggested the introduction of negative interest rates, which would see institutions and possibly even individuals penalised for holding cash.

The root cause of this about-turn is China: the growth of its economy is predicted to decelerate considerably this year and this slowdown is raising fears that the global financial crisis is entering a new phase.

Already, stock markets around the world have suffered significant losses and it is expected that China’s problems could have a knock-on effect on global growth. If the Bank’s Monetary Policy Committee (MPC) does need to stimulate demand in the UK, a rate rise in the short-term is likely to be out of the question.

Are negative rates really on the horizon?

But could negative interest rates become a reality? Such a move has been suggested in the past, shortly after the base rate was originally lowered to 0.5% in March 2009. At the time, it was proposed that only banks would be subject to negative rates so that rather than holding their spare cash with the Bank of England, they would be encouraged to lend it out to consumers and businesses.

But Haldane’s recent speech raised the prospect of everyday savings accounts – many of which are already paying as little as 0.1% in interest – also imposing negative rates. Quite how such a system would work, let alone whether the British public would stand for it, remains to be seen. Nevertheless, it seems clear than there will almost definitely be no strong rise in interest rates in the near future.

Good news for mortgage borrowers, bad news for savers

That’s good news for mortgage borrowers, a large proportion of whom have enjoyed cheap credit for many years now. But for anyone with spare cash, returns from traditional accounts are set to stay at their current low levels for quite some time to come.

Savers who have been following the Bank’s pronouncements over the past few years are probably now used to rate rises being talked up, only to be delayed yet again by new economic problems – the eurozone crisis of 2011-12 and falling UK inflation at the start of this year to name but two.

Finding a ‘new normal’

But even if rates do rise at some point, the consensus is that they will not return to the “normal” levels of a decade ago, when a base rate of 5% or more was common. So for those of us with spare cash, we can either settle for paltry deposit account returns for the foreseeable future or find a more profitable home for our money.

Category: Industry news
Tags: economy

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