Interest rates are understandably important to many people, whether these are low or high. Some will want higher rates to grow their cash, while others such as borrowers will want smaller rates to keep payments lower. The Bank of England’s base rate was first reduced to 0.1 percent back in March 2020, as a direct result to the first widespread outbreaks of COVID-19 in the UK. However, it has been kept at the same rate ever since. Understandably, some have argued this has created stagnation in the economy.
Responding to a question raised in the Treasury Committee recently, Mr Bailey said: “I think we can do that. My view was that the guidance had been met.”
A similar sentiment was shared by Dave Ramsden, the Deputy Governor for Markets and Banking at the Bank of England, when he said: “I gave a speech in July where I sort of flagged that I thought the guidance was close to being met.
“And by the time we got to the August round, my view also was that the guidance, which [as you know] was significant progress on eliminating spare capacity and sustainable return of inflation to target, had been met. But those were always necessary rather than sufficient conditions for tightening.”
Commenting on the base rate decision, Walid Koudmani, market analyst at financial brokerage XTB said: “As widely expected, the Bank of England has left rates unchanged at 0.1 percent with members voting unanimously. While the central bank chose to wait and said that monetary policy remained appropriate, today’s UK PMI data could be one of the factors that influence the BoE to change its monetary policy sooner rather than later.
“The central bank has been under increasing pressure as it contends with the slowdown in economic recovery along with the inflation issues which are being fueled by rising costs and supply chain issues.“
Martijn van der Heijden, CFO at Habito, commented on the implications for homeowners, and said: “Despite today’s decision to keep the base rate steady, all arrows continue to point to a rise being on the near horizon.
“The OECD warned this week, that the UK is expected to have inflation running at about three percent at the end of 2022, the highest rate of the advanced economies. Meanwhile, the governor, of the Bank of England, Andrew Bailey, told MPs on the Treasury select committee that the MPC was split 4-4 in August, on whether the conditions had been met for a rise in interest rates, though clearly haven’t yet decided whether those conditions are “sufficient” for a rate increase.
“Borrowers who are on a variable rate should still consider the impact that any base rate rises this year could have on their mortgage. Even if the rate increases by as little as 0.25 percent, this could see their repayments shoot up by hundreds of pounds a year, so it’s worth looking at all the options.”
Inflation has undoubtedly had some influence on the decisions which have been made about the UK economy and how to proceed going forward.
Recent figures released by the Office for National Statistics only a week ago confirmed the Consumer Price Index (CPI) has risen by a record amount following a brief dip in the summer.
It is expected, however, that inflation will rise to a sizeable four percent by the end of 2021. Although this is thought to be temporary, inflation is clearly continuing on an upwards march for the meantime, and Britons are being urged to act.
Hinesh Patel, portfolio manager at Quilter Investors, provided insight into the impact of inflation on today’s decision, and said: “The Bank of England, in its policy decision today, clearly expects the inflation rate to be higher than previously feared. While they reiterate it will be transitory, it will no doubt be of major concern.
“Ultimately what is flowing through the system right now is “bad inflation”, that is price rises are hitting the most vulnerable households, alongside the impacts of furlough on unemployment uncertainty. This uncertainty is likely to continue with the end of the furlough scheme coinciding with the structural shift in skillsets in the employment market.
“None of these can be solved by monetary policy and as such the BoE should be well within its rights to start tightening its stimulus policy. Unfortunately if it does not it risks doing even more damage on the social divide through ever increasing wealth inequality.”
Lewis Shaw, founder of Shaw Financial Services, stated that any rise to the base rate in conjunction with the end of furlough would have been “tantamount to economic vandalism”, while Simon Lister, IFA at Investing Reviews, described the matter as devastating for savers.
He concluded: “High inflation coupled with rock-bottom interest rates is a perfect storm for savers. Worst of all, it could be many years before the base rate rises given the challenges facing the economy. Despair among savers would be an understatement.”