Interest rates in the UK will rise in Q1 2015, says CBI

The Confederation of British Industry has said that it now expects interest rates to go up as early as the beginning of 2015 in Q1.

Last week (September 5th) saw the Bank of England’s Monetary Policy Committee (MPC) surprise nobody with the news that interest rates would remain flat for another month.

After more than five years at the record low of 0.5 per cent as the central bank has attempted to promote and then safeguard economic growth, it is going to take compelling evidence to encourage MPC to increase the cost of borrowing.

But the attitudes of policymakers have been shifting in the past few months, and minutes from last month’s meeting indicated that for the first time in three years the decision was not unanimous. Two members of the committee had actually voted to increase interest rates, although nine consented to keep the rate flat.

Mark Carney and his colleagues have kept insisting that they will not increase rates until they are confident that economic recovery is both robust and sustainable enough to withstand the changes.

Investors and businesses, however, are expecting this to come increasingly soon.

The Confederation of British Industry (CBI) maintains that the first increase in interest rates from this historic low will come early in 2015.

“We remain of the view that the first rate rise will come in the first quarter of next year,” said CBI director for economics Rain Newton-Smith.

“This reflects the fact that we expect inflation to remain below two per cent and that wage growth is likely to remain relatively subdued for the rest of the year.”

However, she added that wages are likely to increase in the future on the back of higher productivity. That will come on the back of renewed business investment, which CBI says has begun to pick up once again.

Businesses may not be happy about a potential hike in the cost of borrowing, even though it may be a symptom of better economic conditions when it comes.

David Kern, chief economist at the British Chambers of Commerce (BCC), says that exports and the manufacturing sector will benefit from rates remaining static for the time being.

“The eurozone, our largest export market, is stagnant and official figures show that manufacturing activity is at its lowest level since June last year,” he explained. “We must act with caution and ensure the recovery is not put at risk with unnecessary interest rate increases.”