The Future of the Bank of England Base Rate

Many experts feel that today’s very low base rate will remain at rock bottom until the end of 2016.

All the evidence is suggesting that inflation will stay low for years to come, giving the central banks no reason to increase the base rate which sets the benchmark for mortgages, overdrafts and loans.

Mark Carney, Bank of England governer has announced that the Bank of England’s monetary policy committee had voted to increase the base rate from 0.5% to 0.75% with further rises to around 2 – 2.5% by the end of 2016. Carney has further suggested that this could well be postponed for several years and in fact he may finish his five year term in 2018 without even raising the base rate once.

Carney is supposed to have targeted a 2% inflation rate for August, but he was way off with a 0% inflation rate recorded. Oil prices are extremely low and it has been suggested that inflation could even be negative this side in 2015.

The MPC predicts inflation will increase in a year or two, which in turn will justify a rate rise sooner. It will also point to the pressure on wages (and therefore inflation) from the economic miracle of the last few years that has created almost 2m jobs. That said, strong rates of employment should not be dismissed. The main concern as far as the MPC is concerned is that there is little wage pressure as a result, apart from specific areas of the economy where there are shortages of certain skills.

More importantly, very little is spoken about the fact that the industrial production in the UK continues to remain around 10% below the peak in 2008. It is also worth noting that average earnings are struggling to reach the 2004 level and of great concern – to buy tv, car or even a sofa, a huge % of the population are so strapped for cash that they need to apply for a loan! Furthermore, according to the Office for Budget Responsibility, household debt is increasing towards a new peak of 183% of GDP in 2020, surpassing the credit-boom years of 2005-08 when it reached 175%.

The MPC is also keeping a close eye on world trade. World trade saw strong recovery following the 2008 crash however it has been struggling over recent months. World trade relies on China releasing cheap products and as a result of Beijing struggling to maintain momentum following the crisis around 2008, world trade as a whole has suffered.

A few months ago, Carney has made subtle hints that the UK’s economy was growing aggressively enough to start looking at increasing borrowing rates. Is it the end of an era of cheap finance? Janet Yellen, who looks after the US Federal Reserve has also been rumoured to follow suit, albeit very tentatively.

We remain convinced that the UK’s base rate will remain at 0.5% until at least the end of 2016.