Last month, a member of the Bank of England’s Monetary Policy Committee (MPC), Andrew Sentance voted in favour of raising the interest rate by 0.25%. He is the first MPC member to have voted in favour of raising interest rates since August 2008, and he did it again this month. Could this be the beginnings of a growing trend? and if so are we looking at imminent interest rate rises?
I believe not.
Interest rates have now been at a historical low of 0.5% since March 2009. This is an astoundingly low level and in fact one that has never before been reached. To bring it into context, the lowest base rate level reached during the last 100 years was 2%; it remained for 7 years between 1932 and 1939.
The MPC are involved in a complicated balancing act. On one side they have the threat of increasing inflation whilst on the other they have the risks attached with fledgling economic recovery. Although stability is returning to the housing market and wider economy, this recovery is fragile and carefully economic management is required to keep it on track and allow it to strengthen.
Inflation, although significantly above the Bank of England’s 2% target is on a downward trend and generally the committee is of the opinion that this will continue. If this is the case, then the pressure to raise the base rate in order to curb inflation diminishes. Interestingly, the Consumer Prices Index (CPI) stood at 5% in September 2008, considerably more than the current 3.2% level.
This reduction in pressure to increase rates is reinforced by the results of our most recent monthly survey. The number of people who believe that rates will increase during the next 12 months has reached its lowest level since January (63%).
I believe that raising interest rates at this stage is unnecessary and could cause some destabilisation of the housing market and reduce consumer spending, which in turn could have further reaching effects on the UK economy. Although I appreciate that the base rate will need to increase at some point, I think this is unlikely to happen before the effects of the VAT increase early next year have been assessed and economic recovery has become more established. Therefore, although I am of the opinion that rates could increase within the next 12 months, this is most likely to be towards the back end of this timeframe, and even then by only small increments.
If this scenario is correct then we have many more months to enjoy interest rates at levels that have never before been experience. What a great time to invest in property.
