Money Markets Predict No Base Rate Rise Until 2016 | Prepaid365

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29 May 2012

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The Bank of England is unlikely to raise the current base rate until at least 2016 or 2017, money markets have predicted.

This estimate for when an interest rate rise will happen is the furthest it has been since the economy was hit by recession in 2007.

The Bank of England reduced interest rates to their lowest-ever level of 0.5% in 2009, after six reductions in a matter of months.

The base rate of 0.5% has been in place since March 2009, with the central bank hoping this would encourage borrowing and help boost the economy.

But the all-time-low rate, as well as several rounds of quantitative easing, has been unable to halt the British economy sliding back into recession.

The Office for National Statistics (ONS) announced earlier this year that the UK had suffered a double dip recession, after the economy contracted by 0.3% in the first quarter of 2012.

Money markets are now predicting that the Bank of England will be unable to raise the 0.5% base rate until December 2016 or January 2017.

This is compared to just a month ago, when traders had expected the first increase by the central bank to come in 2014.

However, the view of market traders is different to that of economists. The Ernst & Young ITEM Club, for example, has said the base rate could increase as early as next year.

“If global input cost inflation increases again and the domestic economy begins to recover in the manner in which we anticipate, then the MPC will come under increasing pressure to begin increasing bank rate from the middle of next year,” the ITEM Club said.

As well as this, the ITEM Club said it expects interest rates to return to a more standard level, around 4% or 5%, by 2015. However, other economists, such as Capital Economics, have predicted that the first rise will not come until 2015.

The International Monetary Fund (IMF) said recently that the British government should take steps to prepare for collapse in the eurozone.

It has urged the government and the Bank of England to consider increasing quantitative easing or even lowering the interest rates further.

“If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered,” said Christine Lagarde, IMF managing director.

“Measures should be focused on supporting growth and employment. Policies to bolster demand before low growth becomes entrenched are needed,” she added.

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