Interest Rates – When Not If

UK interest rates have languished at an all-time low of 0.5% since March 2009 in a strategy designed to shore up the UK economy through the pain and the aftermath of the financial crisis and recession.

As the economy continues to exhibit signs of sustained recovery, however, interest rates are now widely tipped to rise – and signs of dissent among Bank of England policymakers have fuelled speculation about the timing and scale of such an increase. The Bank’s governor Mark Carney has emphasised that increases – when they come – will be both “gradual and limited” and rates are not expected to reach their pre-recession heights.

The first increase in rates is widely expected to be announced during the first half of 2015 although Carney has stressed the Bank of England’s monetary policymakers have “no pre-set course”, adding: “Rates will go up only as far and as fast as is consistent with price stability as part of a durable expansion, with the maximum sustainable level of employment.” The labour market remains “central” to the Bank’s decisions.

The rate of unemployment is forecast to decline to 5.5% over the next three years while earnings growth, which has failed to keep pace with increases in the cost of living, is expected to pick up. In particular, Bank of England policymakers intend to monitor pay settlements, which tend to cluster around the turn of the year, and real growth in wages is expected to resume around the middle of 2015. The British Chambers of Commerce has urged the Bank of England not to act prematurely, cautioning that higher rates could undermine the UK’s economic recovery.

The rate of inflation has remained below its government-set target of 2% since January 2014, reducing pressure on policymakers to increase interest rates. Looking ahead, the discussion and speculation appear likely to continue, fuelled by fresh releases of economic data and signals from policymakers. Nevertheless, one thing looks relatively certain – an increase in UK interest rates would appear no longer a case of ‘if’ so much as ‘when’.

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