A healthy British economy could lead monetary authorities to raise interest rates4th August 2015
In the second quarter of 2015, economic growth in the UK almost enticed monetary authorities to raise interest rates up to a more historically traditional level. Since the 2009 financial crisis the Bank of England base rate has remained at 0.5%. Prior to the financial crisis of 2008, the base rate hovered between 4-5% and now that growth is on the cards, many are suggesting a return to normal interest rates. This process would underline the fact that England has overcome its turbulences, and that its economy is now safe and sound. However, is the UK ready for a rate rise? We take a look at what the experts think.
Why has the BOE interest rate remained as it is for so long?
Following the difficulties encountered during the crisis, the Bank of England softened its monetary policy - quantitative easing - in order to encourage consumer activity. On the whole this policy is working, and to coin the adage ‘long term economic plan’, Mark Carney - the current governor of the BoE- knew the road would be long. Keeping the base rate as low as possible for as long as possible, without affecting fluidity, is the same successful strategy used by the Fed and the ECB.Whether due to this policy or not, the economic growth in the UK is expected to be 2,6% in 2015, meaning that, for the second year in a row, the country will have the highest growth of all the G7 countries.
Could the UK handle a rate rise? And of how much?
As a raise would not exceed 0.25%, the UK’s progress is unlikely to be disturbed and experts agree that the current situation is good enough to withstand this change. The unemployment rate is at 5.6%, wages are increasing 3% a year, and households seem to be confident about the general trend. Besides, increasing interest rates could prevent future pressure of inflation.
How should investors take this potential rise?
Firstly, specialists agree that this orientation ‘will only occur when authorities are certain that this good omen is to become a general trend’ which generally means they don’t want to have to bring them down after putting them up. However the simple fact that the debate has resumed is encouraging in itself. It shows that the UK has a reliable economy, in which its principal players, the consumers, have confidence. Whilst it is too early to cry victory, we can still be optimistic regarding the future. Those with mortgages have long been in fear of this rise, and whilst Moody’s latest figures show that they can cope with higher rates, the proof will be in the pudding. The simple fact is that when rates so rise, many people will be worse of month to month, causing them to reign in their spending, thus affecting growth. Therefore the key thing is that the rise needs to be of a level that does not bring about a sustained period of contraction.