Interest rates on hold for now, but a rise is on the way
June 12th, 2011
This week, UK interest rates were kept at the record low of 0.5% again by the Bank of England’s Monetary Policy Committee. Economists had widely expected the decision, as recent data has underlined worries about the strength of the UK’s recovery.
The decision comes despite the annual rate of inflation rising to 4.5% in April, up from 4% in March, and well above the Bank’s 2% target and is the 27th straight month that the bank has left rates unchanged.
Meanwhile, the European Central Bank’s president, Jean-Claude Trichet, has signalled that its interest rate could rise next month. The ECB on Thursday held rates at 1.25%, but Mr Trichet said the bank would maintain “strong vigilance” on inflation – widely interpreted as a signal to the markets that rates will be raised at the next meeting.
Analysts believe that continuing high UK inflation also made a rate rise by the MPC likely this year, some analysts believe this could come as soon as next month although that view is not widely held.
In fact, poor UK economic data has led some economists to push back expectations for the timing of the first UK rate hike as far as March next year.
However, with inflation likely to move above 5% in the next three to four months on the back of rising utility bills and food prices and with employment and employment intentions surveys remaining firm, the balance of probabilities favours an earlier move.
Economists say policymakers face a difficult choice: keep rates on hold to help the economy, or raise them to cool inflation. But higher rates increase the cost of borrowing, and there are concerns this may hurt the economic recovery.
The record low Bank rate has led to relatively small returns for savers. The latest statistics from the Bank of England show that, at the end of May, the average rate of interest with an instant access bank or building society account was 0.3%. This has been unchanged since a slight rise at the start of the year.
For cash Individual Savings Accounts, the average interest rate was 0.55%. Three years earlier, this had been 4.56%. However, as long as the Bank rate is low, borrowers – especially those with variable rate mortgages – are seeing relatively low home loan repayments.
This entry was posted on Sunday, June 12th, 2011 at 1:47 pm and is filed under Personal Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.