Interest Rate Rises Back on Hold

The bank of England’s latest Quarterly Inflation Report (QIR) suggests an interest rate rise will not now occur until well after the General Election.

The Governor of the Bank of England, Mark Carney, has been described as “an unreliable boyfriend” for the way in which he has so frequently appeared to change his view on the timing of the first interest rate rise. Back in June he told a Mansion House audience that the first rise could happen “sooner than expected”, which the markets read as being November 2014. However, when that month came, Mr Carney’s introductory remarks at the Quarterly Inflation Report (QIR) press conference were taken as meaning no rate rise until October 2015 or possibly later.

There were two main reasons why Mr Carney was (once again) pushing out the rate rise date:

  1. The Bank had adopted a slightly gloomier view of the global economic outlook, which meant it had nudged down its UK growth forecasts. All other things being equal, slower growth means less pressure for higher interest rates.
  2. Inflation had fallen faster than expected and was now thought “likely to remain close to 1% over the next year”. The outlook for inflation was such that Mr Carney said “it is more likely than not that I will have to write an open letter to the Chancellor in the next six months on account of the inflation rate falling below 1%”. All the previous letters (from Mr Carney’s predecessor) have been explaining why inflation was more than 1% above

Ironically, we seem to be almost coming full circle to when Mr Carney was new to the job and gave his first piece of “forward guidance”: an interest rate review would be triggered when the unemployment rate fell below 7%, which the Bank thought would be in the third quarter of 2016. Unemployment is now 6%, but is not yet creating any inflationary pressure, witness the very low level of pay increases.

The knock on result is that for now savings rates seem set to remain at today’s miniscule levels for close to another year.

The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

22nd December 2014

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