Will Interest Rates Stay Low Forever?

The Bank of England has voted to keep base interest rate at the record low level of 0.5%. This follows David Cameron's comments last week that he would like rates to stay low forever

Morningstar News Team 6 November, 2014 | 3:46PM

The Bank of England once again kept its record low interest rate unchanged as below target inflation gave policymakers time to delay a rate hike, which if implemented prematurely is expected to disrupt the economic recovery.

While businesses and borrowers may welcome the rate freeze, savers are less pleased with the decision to hold base rate at 0.5%. Economists have pushed back their expectations for a rate hike to the second quarter of 2015 after the April General Election.

This was fuelled by the Prime Minister David Cameron last week stating that he would like interest rates to stay low for the long term – if not forever.

Neil Lovatt, director at Scottish Friendly, said that while the Prime Minister may be happy with today’s announcement to hold base rate, but there will be millions of savers out there that will feel that they are not getting the best rates on their savings because of the fragility of the current political landscape.

“The Eurozone is one of Britain’s biggest trading partners and as such, fears over a fresh crisis on the continent and how that might affect the UK economy is probably a leading consideration in the Bank of England’s decision,” said Lovatt.

“When interest rates do rise, those with a mortgage should make hay while the sun shines for them and build up a cushion of savings to draw on if their mortgage repayments start to rise.”

It is estimated that if interest rates rise by just 150 basis points – bringing base rate to 2%, far off the pre-recession levels – there will be a 10% drop in consumer spending. As the economic recovery in the UK has been so dependent on consumer spending, this will have a considerable knock on effect for the public purse.

Real wages have fallen since 2008, if you take into consideration inflation. If mortgage rates rise too soon, before wage inflation picks up, this will mean households are squeezed.

The National Institute of Economic and Social Research said Tuesday that it expects the Bank of England to keep its interest rates unchanged until June. At the October meeting, most members assessed signs of slowdown in the pace of economic growth and there remained insufficient evidence of prospective inflationary pressure to justify an immediate increase in the rate.

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