Will interest rates rise? The pros and the cons

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Will interest rates rise? The pros and the cons

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Author Mark Fairlie

Last month, Britain’s, money lenders and analysists demonstrated once again the existence of a wide divergence of viewpoints on BoE hints that they would begin raising interest rates.

In a recent interview, Bank of England Governor Mark Carney told BBC Radio 4 that the possibility of a rate hike in the coming months had “definitely increased”. Financial markets have since concluded that there is roughly a 50% chance that rates will rise from their current record low this November.

Fuelling the pound

Speculation of rising interest rates sent traders into a buying frenzy in preparation for the change, propelling pound sterling to a new one-year high.

This suggests that the markets view an interest rate rise as necessary to help the pound recover after losing 14 percent to the dollar following the Brexit vote.

The referendum also saw interest rates drop lower than anyone was able to predict with a cut of 0.25 percent. As the full impact of leaving the EU remains to be seen, many are concerned that now could the worst possible time for a hike.

Many believe the current five-year high in inflation is a direct effect of sterling’s depreciation following the referendum. Current figures for economic growth are poor and those dependent on fixed income are suffering.

Dr Sushil Wadhwani, the founder of Sushil Wadhwani Asset Management and past MPC member, suggests that matters relating to the pound and Brexit are “temporary factors” causing inflation and that they would eventually work themselves out of the system. A hike in interest rates would only work to make the situation worse.

And, for low-income households in the UK, waiting for these issues to resolve themselves will undoubtedly have a massive financial strain.

Interest rates

Inflation and Interest Rates

With inflation rising 3% this year, and average earnings excluding bonuses rising at an annual rate of just 1.7%, the current cost of living is quickly becoming unaffordable for many UK households.

For those working in the public sector, whose annual pay increase is fixed at 1%, and people on capped benefits, the difference is even greater.

Because of this, consumer borrowing has been growing rapidly for the past few years.

Dame Kate Barker, the non-executive director at Taylor Wimpey and Man Group and former MPC member, believes this high level of credit has been exacerbated by the Brexit vote, and that “we are going to go into a period of economic difficulty that will be worse if we have people with high borrowing.”

Despite higher rates making it harder for people pay off their debts and mortgages, she states that this will help combat the current trend and make for a more sustainable situation for the public.

Barker believes that raising interest rates will “encourage savers and discourage borrowers.”

Some argue this is not the case. Yael Selfin, chief economist at KPMG, believes that discouraging borrowing is more likely to put further pressure on households struggling with low pay and high inflation. In addition, it will greatly impact new and existing businesses and homeowners across the country with rising fixed costs.

Dr Wadhwani also commented that an interest hike would have been a good idea in past years, but at present, it poses much more of a risk. He stated that higher levels would have “helped to prevent the build-up of consumer debt,” but, at this stage, “the horse has already bolted.”

The E&Y Item Club, Standard and Poor’s, and the British Chambers of Commerce among other experts disagree. Rather, they state that it is too soon for an interest rate hike. They argue that the economy is still far too fragile and, without knowing how much Brexit will affect us, the change will kill whatever growth Britain has had in the past year.

By | 2018-05-30T10:07:51+00:00 October 26th, 2017|Banking, Economy|0 Comments

About the Author:

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Journalist, Mark Farlie, provides cutting edge articles with a focus on plain English & zero jargon. With a breadth of interests, Mark writes on topics such as; personal finance, commercial finance, B2B, marketing, law and technology.

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