In late May, an unexpected debate sparked off. The debate centered on the Bank of England interest rates. The members of the Monetary Policy Committee (or MPC) unanimously approved to hold interest rates. Growing opinion feels the rate rises must start sooner rather than later. According to the minutes of the meeting, some members of the MPC believe that a slower rate increase would warrant a faster tightening of lending policies. Other members oppose an increase in the near future. They fear that such a move could damage the economy. While the vote was to keep the rates at their record low of .5 percent, the MPC decided to “continue to refine its views as the economy evolved”.
The Background of the Bank of England Interest Rates
To understand the full picture on this rate rise debate, one must also understand the background. In mid-May, the governor of the Bank of England stated there was little room for increasing the mortgage rates above their current record low. As the recent debates indicate, the discussion intensified after the publication of the Inflation Report. The report indicates that the local economy is slowly recovering, and the housing market is becoming ‘hotter’. The Bank of England currently faces pressure to explain their plans in handling the low inflation, the process of economic recovery, and the boom in house prices seen in some parts of the country. High-ranking Bank of England representatives stated that the economy currently can’t spare room for slowly returning mortgage rates back to normal.
Meanwhile, an increasing number of MPC members believe that there is room to hike mortgage rates, in order to ‘cool down’ the property market. The chief UK economist at BNP Paribas believes that by summer one or several MPC members might vote for a rate increase provided the UK economy continues to show signs of strengthening.
The issue of financial stability governs both the mortgage rate and the property market. The UK’s Financial Policy Committee (which regulates financial stability) will meet in June. Some experts predict that mortgage loan regulations might become stricter in its aftermath. Their belief has been partly confirmed by a statement made by Charlie Bean, outgoing Governor for Monetary Policy with the Bank of England. In Bean’s view, macro-prudential tools are a good at keeping threats to financial stability in check. Their untested nature might mean that an interest rate rise might be the only safe way out of the current uncertain state.
What Next For the UK and How Will it Affect the Rest of the World?
Several reports (from HIS Global Insight, the CEBR, and City, among others) suggest that the interest rates will only go up in the first or second quarter of 2015. The extent of these increases is debated: some predict an increase of 1 percent. Others point to 1.5 percent (possibly increasing to 1.75 percent by 2015). At the same time, the IMF forecasts that the economy in England and the rest of the UK increase among all the industrial nations in the world. The current interest rates of .5 per cent have been in place for five years. While many don’t believe they can be kept down for a sixth year, it’s still unlikely that the housing market boom will come to be seen as a threat for the stability of the UK economy.
For all the inflation Britain has seen over the past few years, it’s not facing the looming deflation issue that the U.S. and Japan are dealing with. As salaries in Britain continue to drop in real terms and cheap mortgages remain available to the population, the Bank of England will likely decide to tighten mortgage lending rules rather than increase the interest rates.