Low interest rates will continue well into 2015 according to high ranking officials at the Bank of England as only a period of sustained strong growth will see a change.
The Bank’s chief economist Spencer Dale said the weakness of the UK economy and the threat of further world shocks were holding back a change in rates.
Instead he said the Bank would need to see a period with a combination of strong growth, low unemployment and rising incomes before interest rates would change.
It means historically cheap credit will continue to exist well into the year after next and will act as a boost to mortgage payers amid claims that a housing bubble could see rates rise rapidly.
In all likelihood, wages are unlikely to begin rising above the rate of inflation until 2015 and will not do so consistently until 2016 – which is also when the bank expects unemployment to drop below its target of 7%.
The long-lasting effects of recession
Mr Dale warned that recent optimism could not be taken for granted and pointed to a breakdown of trust as the driving factor as to why businesses are reluctant to borrow.
“Events of the past few years may colour and contaminate business behaviour for many years,” he warned.
His comments echo those of the Bank’s governor Mark Carney who has recently moved to dismiss reports saying the rise in house prices would require higher rates.
Mr Dale likened the housing market to a microwave saying its “turning from lukewarm to scalding hot in a matter of a few economic seconds” but said the Bank is “far better equipped to respond to these types of risks than in the past”.
Encouraging investment
Low rates stand to encourage businesses to invest in equipment and technology while it also benefits households who are struggling to make ends meet.
Mr Dale said: “You can plan for the future in the knowledge that the MPC [the Bank’s monetary policy committee] intends to keep interest rates low until we’ve seen a prolonged period of strong growth, unemployment is significantly lower, real incomes are higher.”
He speculated on a possible rate change but said it remains “some way in the distance”.
Expert Comment: Low interest rates can prove beneficial in some cases; ask the millions of home owners who continue to enjoy lower mortgage payments. Of course, that is really not how a growing economy should be functioning. Prepaid cards typically do not earn interest on card balances, so prepaid card users are not affected by the low interest rates but this does have implications for prepaid card providers, who earn interest on the balance across their card portfolio – as lower interest rates, means lesser revenues for these providers which may eventually result in greater fees for consumers – Amit Sharma
Amit Sharma is the CEO and Founder of www.prepaid365.com and a senior prepaid industry consultant. You can follow him on LinkedIn.
