Low interest rates look like being the long term normMake Text Bigger
After the Bank of England quarterly inflation report, and attending the regional seminar, all the latest indicators have revised down any risk of a rise in the Bank Base Rate.
I have been arguing for some time against the need to increase rates based on economic headwinds, but the latest figures all show a marked decrease in inflationary pressure and general world wide stagnation especially in Europe.
You can see in this chart to the left how market expectations for interest rates have suddenly been revised down
The Chart to the right demonstrates why fixed rate mortgages have been falling with a marked decrease in the cost of 5 year nominal interest rates.
Although a rate decrease is less likely to be considered than stimulating the economy with further Quantitative Easing nothing is as yet off the table. This is because the Bank of England have to report to the government if inflation levels drop below the target of 2%. You can see from the chart to the left that we are heading towards 1% inflation.
The inflation rate is important to the government as it is very difficult to reduce the deficit without the assistance of increasing prices and tax revenue. In fact despite government efforts in making cuts the budget deficit this year will not actually fall at all. Increases in the welfare state budget were capped at 1%, but inflation is falling back down to this level so there have been no real budgetary cuts.
Unemployment is now at its lowest level since 2007 and this would normally cause an upward inflationary pressure. However as can be seen in the table to the right there has been a fundamental change in the composition of the labour force with a greater percentage moving away from high skilled, high earning jobs to more low skilled, low income jobs.
Western economies have shifted towards being less business friendly with ever greater regulation and costs with no political incentive to reverse this. Therefore it is likely that interest rates could stay low in the medium and even long term as the world markets correct themselves.
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