Interest Rates to Rise to 2.5%

Bank of England governor Mark Carney has suggested base rate will rise to 2.5% by early 2017, where it will stabilise for some time

Emma Wall 27 June, 2014 | 1:39PM
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After five years of record low interest rates, savers have received key guidance about when base rate will start to rise.

Governor of the Bank of England Mark Carney indicated that interest rates would rise at the end of this year earlier this month, with economists predicting rises of 25 basis points every three months. The announcement was seen as something of a u-turn by economists.

However the rate rise may be more sharp than that if Carney’s latest indicators are anything to go by.

Speaking on BBC Radio 4’s Today programme on Friday morning, Carney suggested that the “new normal” for interest rates would be 2.5%, like to be reached by early 2017. Before the dramatic cut to 0.5% in March 2009, 12 months previously Bank of England set base rate at 5.25%, but Carney said that too much had changed for rates to return to this level.

“The big picture is where interest rates go in the medium term, because if I am taking out a mortgage and if I am thinking of investing in a new plant, if I'm thinking about taking on new people. That's what I'm thinking about," Carney said.

David Lebovitz, global market strategist at J.P. Morgan Asset Management said that Carney was continuing to try and give investors a sense of what to expect when rates do in fact rise.

“While the timing of an increase will be dependent on the data, the Bank of England has clearly signalled that they understand the impact that higher rates will have on everyday consumers, particularly with respect to housing.”

Base rate has averaged at 6% over the past 30 years, highlighting the drastic action the Bank has been forced to take in recent years.

Lebovitz said that the UK circumstance is not dissimilar from what is occurring with the Federal Reserve in the US.

“The Fed currently expects interest rates in the medium-term to remain below the long-term average of about 4%, even once it has met its dual mandate of full-employment and price stability,” he added.

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Emma Wall  is former Senior International Editor for Morningstar