Bank of England forecasts could spell good or bad news for interest rates...

12 February 2015

moneyHurrah! Inflation is still at a record low 0.5%, which means that things still feel like they cost less while the cost of living is rising at a lower rate than wages. This is Good News, right? Well it might be, but in the Governor of the Bank of England’s latest report, there may yet be some clouds, or even more sunshine, on the horizon…

Every month, Governor Mark Carney has to write to the Chancellor explaining why inflation isn’t 2% (assuming it isn’t. Which it normally isn’t). While inflation was high and wages growth was low, we were all feeling the pinch. Now, while inflation is low and interest rates are also low, with the best and cheapest mortgage deals ever seen, we should all be celebrating. But cautiously.

Mark Carney, in his letter to the Chancellor, explained that inflation is basically artificially low at the moment owing to the impact of falling oil prices bringing down the ‘average basket’ prices. There are also grocery anomalies down to supermarket price wars on certain products. However, what no one wants to see is a cycle of deflation- although inflation is expected to dip over into negative for a couple of months and then remain static at around 0% for the rest of the year. While this is good in the short term, negative inflation for two successive quarters would mean we would be back in another recession, and no one wants that. Going back on previous suggestions, Mr Carney confirmed that any sustained deflationary period would be addressed by a potential reduction in interest rates. Yes, if things start turning black, interest rates could go even lower than the unprecedented 0.5% we have currently. Which is great news for borrowers, not so good for savers.

But what about if things don’t go down the inflationary drain,and inflation picks up and stabilises around the target 2%? If this does happen, then you can perhaps expect to see interest rates rising earlier than predicted. At the moment, analysts are pegging late 2016 as the first rate rise date, but after today’s forecasts, some are revising those predictions up to early 2016, given a rise in projected growth figures. Which could mean an earlier increased mortgage payment cloud on your horizon- unless you have tied into a fixed rate, that is.

TOPICS:   Economy   Banking


  • Mike
    Negative inflation for two successive quarters is not a recession. Negative GDP growth for two successive quarters = recession.
  • Angry S.
    So, in summary, they've not got a feckin' clue. Same as the rest of us then, but paid more.

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