Should the UK keep interest rates at 0.5% for 2014?

Interest rates in the UK are unlikely to rise this year according to most of the UK’s top economists. They believe that rates will remain at their historically low value of 0.5% until the end of 2014 at the very least. Interest rates have always been used as a monetary tool by the Monetary Policy Committee (MPC) in order to control inflation. Now with inflation having met the 2-3% target the Bank of England’s attention has turned towards the unemployment rate.

A low interest rate should, in theory, encourage businesses and consumers to take out loans and invest which should then stimulate the economy and increase the amount of jobs available thereby reducing unemployment. The Bank of England has always maintained their stance over a 7% target on unemployment before allowing rates to rise. Currently, unemployment stands at 7.4% but with many expecting the 7% figure to be met before the end of this year people are still in doubt as to whether Mark Carney will put up rates.

Housing has been a major issue over the course of 2013 with prices soaring. The average house price rose 8.4% according to Nationwide and whilst an increase in interest rates could possibly deter this bubble from expanding, it could also make mortgage repayments more difficult. A 3% rise would leave 1.1 million people struggling to make repayments. However, only a small increase is unlikely cause a significant change in the housing market due to its momentum. Countries other than England are likely to face consequences as well with a 1% increase likely to cause the average mortgage payment to rise by £50 a month in Northern Ireland.

Energy, food and travel costs have risen substantially draining any spare income of the consumer. As a result, some say that too much attention is being paid towards the unemployment rate. If the actual productivity of the UK economy rises then disposable income should be able to increase without affecting inflation. Most economists believe that disposable income will overtake inflation by 2015 but what role inflation rate plays is questionable.

Other factors in the UK economy such as consumer and business confidence and the state of the Eurozone need to be considered. The lack of growth in the rest of Europe is restricting UK exports and is also making imports expensive due to a lack of suppliers. Businesses in the UK are very limited and are unable to fully function as they would in a period of recovery or a boom. As a result they are unable to supply the amount of jobs that they could and are lacking in efficiency and productivity. Consumers are also unsure over their job security so are not in a position to commit to any kind of long-term investment.

The UK economy is on the road to recovery but the end is still opaque. We will never return to normality until interest rates rise but until employment and disposable income is stable, rising interest rates are not an option. As a result, I would expect the Bank of England to keep figures at 0.5% for the rest of 2014 at the very least.

Contributed by Jordan Naidu

One thought on “Should the UK keep interest rates at 0.5% for 2014?

  1. As an increase in interest rates will mean that the cost of borrowing rises, this is good news for businesses which operate in markets which are very sensitive to changes in rates. These markets often involve goods and services where the purchase is financed by debt and where the price paid is relatively significant compared with the customer’s income, for example housing and motor vehicles. However increased cost of borrowing will also reduce the disposable income of consumers, which will cause demand to fall for consumer goods, having a negative effect on the economy and business.

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