Turning the Interest Rate Cycle

Last week the Bank of England raised base rates for the first time in 10 years. As so often with economic decisions it is easy to argue whether this is a good or bad decision. Many will do so. Some no doubt will agree with both statements!

 

Although the base rate has “doubled” in reality the Bank is simply increasing base rates by 0.25 per cent - returning them to where they were last year, few expect a significant increase in the next 12-18 months.

 

However this does mark a change. The UK has experienced the longest period of low interest rates in modern times. This has been compounded by “Quantitative Easing” in which the Bank has pushed even more money into circulation. The policy has helped companies that might otherwise have folded during the last recession and helped us secure the highest rate of employment ever.

 

However it is not all good news. Pensioners have seen their incomes hit and savers have received little return. If you already have a mortgage you have benefitted: however one impact of the low interest rates may have been to increase house prices faster, adding to the difficulties of first time buyers. (The number of 25-34 year olds who are owner occupiers has fallen from 60 per cent to around a third in 10 years). One argument in which economists are currently engaged is whether our ultra low interest rates have helped too much companies that can afford to meet their current interest bill – because it is so low – but can’t afford to invest. They believe our productivity will actually be helped when higher rates enable really competitive companies to gain market share and succeed. This is important as it is our productivity that determines how much we can grow our economy and improve our living standards.

 

Although we will all worry about those adversely effected by the rate rise I do think this was a necessary step by the Bank of England. What we all want is economic stability and a path of gentle increases is definitely a better option than the risks of an “asset price bubble” or boom and bust.

 

Photo caption: With Headteacher Nick Avey and pupils at Rusper School last week. Ofsted recently rated the school Good commending effective leadership and the hard work of the staff team.