The Other Side: How Higher Interest Rates Could Be A Good Thing

Last week, LSBF experts applauded Bank of England Governor Mark Carney’s announcement that, despite positive economic figures, there is no need to increase interest rates yet. Today, we present counter-arguments from disagreeing LSBF experts …

A week after Bank of England Governor Mark Carney declared that there was no need to raise interest rates, the general public seemed to be appreciative of his statement. Some LSBF experts agreed too.

On 27 January, we published our experts’ view on keeping interest rates low. Their position was that keeping interest rates flat at the moment would keep growth steady. Increasing rates at this point in time might also hinder the economic recovery. The UK has been posting strong economic recovery and the employment rates are improving. Perhaps, they believe, it would be best to not upset this trend.

However, a few LSBF experts seem sceptical about this move.

Dr Richard Osborne, LSBF Associate Lecturer:

“When the patient is virtually in a coma and being drip-fed through quantitative easing, then raising interest rates may well produce an unfortunate reaction. That is why there is no immediate need to raise interest rates. However at some point somebody will have to admit that it has to be done.

Interest rates will have to be raised eventually because at this artificially low rate it is destroying savings and distorting the property markets, as well leading to higher potential inflation.”

Philip Brabin, LSBF ACCA Lecturer:

“The maximum effect of an interest rate movement typically takes between one and two years. Interest rates must therefore reflect projected inflation rather than current.

Wages have stagnated since the financial crash and as the cost of living continues to rise, in the context of a wider economic recovery, workers will increasingly demand higher wages to compensate for a decline in real income since 2008. This is likely to drive inflation back up over the coming years as prices reflect increasing wage levels.

Furthermore, with an impending general election in 2015, the government and, rather cynically, the Band of England appear to be taking a short term view by holding interest rates at 0.5%. An interest rate rise now would bring about a degree of financial realism in the context of a debt fuelled recovery, lessening the eventual financial suffering that awaits households when interest rates inevitably rise.”

The case for raising interest rates in the long-term is strong. Our experts cited factors ranging from savings erosion to having adverse effects on inflation behind this.

If Bank of England does decide to gradually raise rates in the future while keeping it flat for the moment, it might be beneficial to the UK economy. Will it decide to do so in its imminent 6 February interest rate announcement? That remains to be seen.

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<Principal image courtesy Wagner T Cassimiro/Some rights reserved>