Forecasts show interest rate may not rise

According to a forecast by the EY Item Club, a forecasting body, the Bank of England should refrain from interest rate rises rates next month. Bank governor Mark Carney, however, says that rates could still be expected to rise in the “relatively near term”, with many analysts still expecting the rate to be raised in November.

According to the EY Item Club, however, such an interest rate raise could risk damaging the United Kingdom’s “fragile economic outlook”. The EY Item Club has therefore implored the Bank of England to wait another year before raising the interest rate benchmark from 0.25% to 0.5%.

This recommendation has arisen after the British Chambers of Commerce and the ratings agency Standard and Poor’s suggested economic growth was not strong enough to justify raising interest rates.

The EY Item Club, which utilises the same forecasting model as the Treasury, has predicted that growth in UK GDP would slow to 1.5% this year and 1.4% in 2018.

It is expected by many that the Bank Monetary Policy Committee will raise interest rates at the next meeting, to be held on the 2nd November, but the EY Item Club is urging for the committee to wait until the economy has picked up further before doing so.

According to Howard Archer, Chief Economic Adviser to the EY Item Club, “While it is understandable that the Monetary Policy Committee will want to gradually normalise interest rates from their current ‘emergency levels’, we believe it would be better to do so once the economy is on stronger footing.”

Interest rates in the UK have not been raised since July 2007, prior to the financial crisis. Since then, they have been kept low in order to boost the economy through public spending, by limiting the cost of borrowing whilst reducing the incentive to save.

The Bank of England cut the interest rate further, from 0.5% to 0.25%, in an effort to restimulate the economy following the country’s vote for Brexit.

However, recent low unemployment rates and high inflation have made a rise in interest rates more likely in the very near future.

In an interview with the BBC at the end of September, “If the economy continues on the path that it’s been on, and all indications are that it will, in the relatively near term we can expect that interest rates will increase.”

The Bank of England is tasked with using interest rates to keep inflation at 2%. It is currently at 2.9%. However, according to the EY Item Club, inflation will fall back to 2% by the end of next year as the effects of the weaker pound begin to wane.

It is said that public spending would slow from a 9-year high in 2016 (2.8%) to 1.5% this year, as a result of inflation, limited rise in wages and a slow housing market.

According to the latest retail industry figures, footfall fell by 1.2% in September. The chief executive of the British Retail Consortium, Helen Dickson, most shopping destinations faced a decline for the third consecutive month.

The British Chambers of Commerce said on Friday that it was “extraordinary” to hear that the Bank of England was considering raising the interest rate whilst economic growth remained muted.

Earlier this month, Standard and Poor’s said that it was “a bit sceptical” as to the need for an interest rate rise in the UK.

Others, however, have argued that the economy is indeed now strong enough to move away from emergency rates.

Here at Phebys, Chartered Accountants in Cambridgeshire, we’re interest rate experts. If you have any questions about the potential interest rate rises, contact us on 01480 896268, or email admin@phebys.com, and we’ll be happy to speak with you.

 

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