Losing Interest?


December 15, 2014

Godfrey Blight is a director at Capita Mortgage Services

We are all naturally fixated with interest rates, which dictate so much of how our businesses function. Scan though this very publication and that well known and (sometimes) well-loved percentage symbol will leap out at you, clamouring for your attention with desirable deals and irresistible offers. This has never been more true than now, with the rate war in full swing. It’s basis points at dawn for most of the UK’s lenders at the moment.

In the midst of the exchanges comes HSBC with a dispatch from the front. They are now predicting that the Bank of England’s base rate, held at 0.5% since 2009, will not rise until 2016 at the earliest. Which is bizarre, as this was one of the most common predications being bandied around back in 2013. In all fairness, they have a good chance of being right.

Super-low interest rates are frequently being described as “the new norm”. To some extent, our society is now addicted to them. Over the course of five long years, even those most cautious with their finances may well have adapted to their circumstances, moulding their expenditure to the limits of a seemingly fixed enclosure. However, these walls are made of sand. They look solid enough, but all it will take is the waves coming in to illustrate how much of an illusion that is.

It might not be high tide yet, but the time is certainly dragging on. Since August, two members of the Monetary Policy Committee (MPC) have consistently voted to increase the base rate to 0.75%. With this loss of unanimity comes an increased possibility that these voices may eventually sway the direction of monetary policy. Certainly, the arguments for a rise, as shown in the latest MPC minutes, are almost as convincing as the prospective merits of holding it in place.

So, when will interest rates rise? No-one really knows for sure. However, what we can take from this is the fact that a sudden interest rate spike is extremely unlikely. A slow increase in interest rates over a period of years is much more feasible, and in all probability will cause minimal disruption if implemented carefully. When the waters come, we might just have learnt how to swim again. 

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