January 27 ,2014 | by Thiago Kiwi

Expert View: Should UK Interest Rates Remain Low?

Should UK Interest Rates Remain Low

Last week, Bank of England Governor Mark Carney announced that there is no immediate need to increase interest rates despite rise on employment figure. LSBF’s experts share their views on the topic …

 

At the World Economic Forum in Davos, Bank of England Governor Mark Carney said that there would be no interest rate hikes. Mentioning the labour market as a vital factor, Mr Carney said, “It’s really about overall conditions in the labour market, and that’s what affects it.” He went on to add, “We wouldn’t want to detract from that focus by unnecessarily focusing too much on one indicator.”

How does this declaration affect the market? Is it positive news? LSBF finance faculty seem to agree that keeping interest rates unchanged for the moment might be the smart thing to do.

 

Graham McDonald, LSBF CFA Programme Director:

“Is the Bank of England right to keep rates on hold for the time being? Yes. There is little economic recovery outside London and the South East. Household income will no longer benefit from missold PPI refunds. Eurozone rates look set to stay low for some time to stave off deflation. A rise in UK interest rates, with the resultant strengthening of the Pound Sterling against the Euro, would cause a further deterioration to the trade deficit.

Households and small businesses would struggle to meet higher debt service costs if interest rates rose and banks are not yet in a position to absorb the losses on more non-performing loans.

Yes, rates at this level do create risks of equity and property market bubbles and a steep increase in inflation in due course; these risks outweigh those of another series of loan write-downs for banks.

Rates need to stay low until household income has significantly improved; recent productivity data showing declines in per capita output suggest this is still some way off.”

 

Robert Wood, LSBF Director of CIMA:

“Bank of England keeping interest rates unchanged makes economic sense, so I’m most definitely for it. The lowering of interest rates saved the economy in the first place and avoided massive debt defaults across the population. Raising them now will stifle the UK economic recovery and see demand restrict massively.

Wages haven’t increased in line with inflation for many and taking cash out of their pockets will just see us relapse into recession again. The age of interest rates at over 6% was a disaster for all and, if we end up going back to it, the UK will cease to be a centre of economic development.”

 

The verdict from the experts signals a resounding ‘Yes’ to this move to keep interest rates unchanged. However, it also brings into question Bank of England’s plan for the market. Having earlier said that interest rates hikes would be considered once unemployment hit 7%, it seems like the Bank of England has backtracked on its promise.

Dr Steve Priddy, LSBF Head of Research, questions, “The link between UK unemployment and interest rate need not have been so prescriptive in the first place.  How credible is Bank of England’s ‘forward guidance’ now?”

Analysing the ‘forward guidance’ raises a valid question on its utility. When Mr Carney stated that the British economy was in a different place from last summer, he seemed to be indicating an end to ‘forward guidance’. But nothing is set in concrete for the moment.

The support for this move has been immense. Though it seems likely that interest rates will stay put, Bank of England’s official interest rate policy announcement is due on February 6.

Until then, we wait…

 

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<Principal image courtesy Images Money/Some rights reserved>

Thiago Kiwi

Thiago is the LSBF Blog Editor who manages news and features content on the site, and writes about business, finance, technology, education and careers.

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