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Interest rate rise some way off

Robyn Hall

August 13, 2014

Speaking this morning as he unveiled the Bank’s quarterly economic forecast he said record participation in the jobs market, weak wage rises and a growing number of threats to the global economy meant that whenever rates did rise they would do so gradually.

He said: “What we are putting emphasis on, is the path of interest rates, which is limited and accommodative.”

Eddie Goldsmith, chairman of the Conveyancing Association, said: “The announcement today suggests that home-owners can breathe slightly easier about a rate rise this year.

“Despite a concern in some quarters that there is a dangerous reliance on low interest rates, a sudden rate rise compounded with the new tougher mortgage rules could have a serious consequences for the market.

“While rates are likely to go up, the Bank favours a limited and gradual approach which will see rates increase incrementally over a longer period of time.

“It’s absolutely the right approach, in my view there’s little evidence to suggest that the UK housing market is a bubble about to burst, there’s still slack in the economy and wages remain weak – holding the key rate for the rest of the year will ensure that the market remains buoyant.

“My one concern is that a rise in interest rates, whenever it comes, will inevitably hit first time buyers the hardest.

“In a world of higher rates they are going to have to lean even more on their parents to help them raise enough money to put down a deposit.

“This is going to be especially problematic for those situated in London and the South East.”

And Neil Lovatt, director of financial products at Scottish Friendly, said: “The Governor has once again given an upbeat forecast of where the economy will be heading in in terms of growth and inflation, while remaining cagey around what impact this might have on any potential interest rate rise.

“The ideal timing of a rate rise is before all the slack has been used up, but the Bank’s estimate of spare capacity in the economy has now been readjusted. As a result, an interest rate rise could be a little further away than first thought.

“To read between the lines, the message today is that rates are still destined to rise, but when that will be is still up for debate. The fickle nature of the UK economy seems to keep everyone guessing.

“Any rate rises will be small, but even very small rises in interest rates will have a significant effect on what is still a fragile economy. That said, savers thinking that the ‘good old days’ of high interest rates will return are going to be sorely disappointed and the sooner we adapt to this environment the better.”

Scott Jamieson, manager of the Kames Inflation Linked Fund and head of multi-asset investing at Kames Capital, said: “The backdrop for today’s release of the Bank of England’s latest Quarterly Inflation Report was set by the news that UK average earnings fell in June – the first monthly decline since May 2009. In the aftermath of the Credit Crunch, the BoE was under great pressure to respond to surging inflation – RPI growth registered 5.6% at one stage. For high rates of inflation to be a durable problem, pay rates need to reflect the higher cost of living. They didn’t then and, on balance, they haven’t since. Not only does the latest QIR draw attention to the ‘continuing weakness in wage growth’ but it forecasts wage growth of just 1.25% at the end of this year.

“The QE-economies of the UK and US have sought to retain market confidence by guiding on the pre-conditions that need to be satisfied before any rise in official interest rates is to be considered. The principle criterion set was the level of unemployment. However this economic cycle is, both home and abroad, has been characterised by unprecedented falls in unemployment. Without any consistent movement in either wages, discretionary consumer spending or inflation policymakers have ratcheted down the threshold below which unemployment was judged too low (for price stability). The QIR maintains this pattern with a latest estimate of 5.5% for the equilibrium unemployment rate (the latest reading was 6.4%).

“Taken together with a central estimate of consumer price inflation of 2% i.e. on target, the QIR guides investors to expect that a sequence of rate rises would, if it occurs, be very gradual. Overnight various media reports have drawn attention to indications that Janet Yellen, Chair of the US Federal Reserve, still worries that the Fed tighten monetary policy before the expansion is sufficiently robust. It is unlikely that Mark Carney sleeps any easier in his bed.”


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