Over recent months there has been much speculation about the future of Britain's interest rates and the possibility of a rise in the near future.
There are those who argue that with increasing economic growth and falling unemployment, it is time for an increase in interest rates. Although such an increase would help savers who have suffered during these times of record low interest rates, such an increase could potentially put the fragile economic recovery at risk. This blog sets out to highlight the potential implications of such an increase in interest rates. It will also highlight why we should hold off such an increase until we know the economy can withstand it or when the risks of keeping interest rates as they are start to out weight the benefits. A key example of this would be the build up of another consumer debt bubble which could become increasing difficult to manage the longer it is allowed to fester.
If the Bank of England were to increase interest rates in the near future, the first direct impact onto the general public would be an increase in the interest rates on debt such as mortgages. This would result in those making mortgage payments having less disposable income which undoubtedly will have a negative impact on economic growth. Furthermore, there are those that will be unable to afford such an increase in their mortgage payments. This will result in an increase in the number of mortgage defaults, increasing bank losses, reducing lending to consumers and lowering house prices. This will provide another unneeded shock to the economy and further harm economic growth.
The main role of the Bank of England is that of controlling inflation and keeping it within the government's 2% target. Now that that target has been met there is less motivation for the bank to consider increasing interest rates. Furthermore, the current low interest rates are helping to boost consumer spending and business investment and is contributing to the fall in unemployment. As such, an increase in interest rates will put that continuing fall at risk. In addition, this will also dampen any increase in wages that may come in the near future, further fuelling the cost of living debate.
The effect of all these problems on economic growth will be exemplified by the fact that we are currently experiencing a consumer led recovery. As such, any action that dampens consumer spending will put Britain's fragile economic recovery at significant risk. This could fuel a downward economic spiral which will require significant corrective action by those in positions of power, especially if outside factor fail to help pick up the slack.
As such, it is simply prudent for the Bank of England to wait before considering increasing interest rates until they can be certain that the economy can withstand it. However, as stated before, this is unless there is a significant change that results in the risks associated with increasing interest rates being out weighted by the benefits. This is naturally bad news for savers, but will benefit the majority of people in the longer term by reducing unemployment and boosting long term wages. But the continuing consumer led recovery may come haunt us if the recovery doesn't become more balanced. As such, those in power must do what they can to boost exports and encourage business investment. This will provide us with the room to slow down consumer spending and prevent a consumer debt bubble from taking hold.
Jason Cates
There are those who argue that with increasing economic growth and falling unemployment, it is time for an increase in interest rates. Although such an increase would help savers who have suffered during these times of record low interest rates, such an increase could potentially put the fragile economic recovery at risk. This blog sets out to highlight the potential implications of such an increase in interest rates. It will also highlight why we should hold off such an increase until we know the economy can withstand it or when the risks of keeping interest rates as they are start to out weight the benefits. A key example of this would be the build up of another consumer debt bubble which could become increasing difficult to manage the longer it is allowed to fester.
If the Bank of England were to increase interest rates in the near future, the first direct impact onto the general public would be an increase in the interest rates on debt such as mortgages. This would result in those making mortgage payments having less disposable income which undoubtedly will have a negative impact on economic growth. Furthermore, there are those that will be unable to afford such an increase in their mortgage payments. This will result in an increase in the number of mortgage defaults, increasing bank losses, reducing lending to consumers and lowering house prices. This will provide another unneeded shock to the economy and further harm economic growth.
The main role of the Bank of England is that of controlling inflation and keeping it within the government's 2% target. Now that that target has been met there is less motivation for the bank to consider increasing interest rates. Furthermore, the current low interest rates are helping to boost consumer spending and business investment and is contributing to the fall in unemployment. As such, an increase in interest rates will put that continuing fall at risk. In addition, this will also dampen any increase in wages that may come in the near future, further fuelling the cost of living debate.
The effect of all these problems on economic growth will be exemplified by the fact that we are currently experiencing a consumer led recovery. As such, any action that dampens consumer spending will put Britain's fragile economic recovery at significant risk. This could fuel a downward economic spiral which will require significant corrective action by those in positions of power, especially if outside factor fail to help pick up the slack.
As such, it is simply prudent for the Bank of England to wait before considering increasing interest rates until they can be certain that the economy can withstand it. However, as stated before, this is unless there is a significant change that results in the risks associated with increasing interest rates being out weighted by the benefits. This is naturally bad news for savers, but will benefit the majority of people in the longer term by reducing unemployment and boosting long term wages. But the continuing consumer led recovery may come haunt us if the recovery doesn't become more balanced. As such, those in power must do what they can to boost exports and encourage business investment. This will provide us with the room to slow down consumer spending and prevent a consumer debt bubble from taking hold.
Jason Cates
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