UK base rate held at 0.5%

UK base rate
Mark Carney: interest rate conundrum

In a move that surprised absolutely no one, the Bank of England has announced today that its base rate is staying at 0.5%.

This follows the nine-man Monetary Policy Committee’s (MPC) earlier vote to keep rates at this never-before low for the 60th consecutive month.

But the perceived need for continued market stimulus is creating a difficult presentational balancing act for the Bank’s Canadian governor, who is keen to reassure households and businesses that a rate hike is not as close as they might fear.

Mr Carney’s move follows a fall in January’s recorded unemployment levels to 7.1%, just a whisker above the 7% he said would trigger a rate re-evaluation. If the UK economy does grow faster than last year’s 1.9%, the pressure to raise base rates will intensify, potentially spelling trouble for millions of homeowners. Many commentators see UK rates rising to nearer 3% within two years.

 

Forward guidance

In his ‘forward guidance’, issued last summer after succeeding Sir Mervyn King in the job, Mr Carney said unemployment was unlikely to reach the 7% mark before 2016. In other words, he believed there was little prospect of rate rises until safely after next year’s general election.

However, this issue could pose a challenge to his credibility because UK unemployment has declined must faster than expected, and looks set to fall below 7% within months, if not sooner.

Speaking at last month’s World Economic Forum in Davos, Mr Carney reaffirmed his view that rates should stay put for some time, a position apparently not shared by all of his fellow MPC members. So, having nailed his colours to the ultra-low interest rates mast, he could face the risk of being outvoted by his MPC colleagues, who are increasingly thought to favour rises.

 

Debt deflation

Many market analysts believe it would be sensible for Mr Carney to announce a cut in his unemployment trigger point to 6.5% when delivering his inflation report next month.

However, even if rates do rise, the view is growing that any increases across developed economies like the UK will be minimal, restrained by the chronic and still-rising levels of public, corporate and household debt.

This argument was taken up by former US Treasury secretary Larry Summers in November. He said interest rates will have to stay negative – between to 2% to 3% below inflation – for many years as a stimulus to offset the deflationary effect of debt. But with inflation at barely 2%, the scope to do this is limited, removing many of the levers of traditional macroeconomic theory.

So, wherever Mr Carney’s interest rate balancing act takes him, it will very likely be closely watched by homeowners, who have their own balancing act to perform.

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peterbatt

Peter a journalist with 30 years experience of freelance writing, UK national newspaper and magazine production roles, and business development. In 2007, he developed and launched a mainstream-style green consumer magazine in the UK, called GreenerLiving, as a means of promoting sustainable change ‘within the system’. GreenerLiving closed during the post-crash recession, but Peter went on to become managing editor of the international ethical business title, Ethical Performance. However, Peter felt that the CSR sector has not succeeded in changing corporate priorities anywhere near fast enough, and so I decided to leave the treadmill of corporate employment and debt accumulation to focus on my own projects. Now poorer but a billion million times happier, he writes on political, economic and social issues – usually seriously, but sometimes as satire. He's currently writing Psychopath Economics, a book about the logic of social and economic power, belief systems, and the rise and fall of societies. Peter is convinced that ordinary people must educate themselves and exercise their economic leverage if we are to avoid social and environmental destruction.

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