New “Natural” Base Rate for the UK could be 3% or less

by Neil Patterson

11:27 AM, 12th March 2014
About 6 years ago

New “Natural” Base Rate for the UK could be 3% or less

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New “Natural” Base Rate for the UK could be 3% or less

Over the last few weeks there has been a steady string of press releases by individual members of the Bank of England’s Monetary Policy Committee (MPC) commenting with their own thoughts of how Base Rate may rise when and to what point.

I think it is safe to assume that this has been choreographed by the Bank of England to help manage public and press expectations on future interest rates. What is becoming apparent is that the MPC are now of the opinion that even when the economy has recovered and is performing well the natural base rate will be more like 2.5 to 3% rather than the more historic 5% of the past 20-30 years.

Now Mark Carney, the governor of the Bank of England has come out with his own opinion that interest rates could (not will) hit 3% by some point in 2017. Latest opinion using the MPC’s own figures is that we are unlikely to see a rise before 2015 and that any increases would be small and gradual eg. 0.25% at a time.

During a Treasury Select Committee hearing yesterday MPs accused “Forward Guidance” of being dead and buried after unemployment fell below 7% unexpectedly. Conservative MP Brooks Newmark also quipped unhelpfully that it more resembled “fuzzy guidance”.

Mark Carney responded by saying, “we provided guidance that was well understood. Businesses indicated it gave them greater confidence in the recovery and influenced hiring and spending decisions, contributing to falling unemployment.”

“These 18 indicators are not part of the new forward guidance. They are the fulfillment of a commitment the Bank made to implement recommendations to improve transparency and forecasting. We have provided more detail about our forecasts and it allows greater perspective.”

“Interest rates will rise on a gradual and limited extent. Some Monetary Policy Committee members have put more precise figures on when interest rates will rise over the three year horizon. Charlie Bean said an increase of 2 per cent to 2.5 per cent and I don’t think that is an unreasonable sense to get across.”

Separate to considerations of future interest rates Andrew Tyrie, the chairman of The Treasury Select Committee, criticised the Bank of England for destroying MPC meeting notes as showing a lack of transparency and record keeping for historic economic decision making.

However Paul Fisher the deputy Bank Governor made the point that retaining word for word records would likely make any discussions less open and frank leading to a lower quality debate of what should happen.

I am very much inclined to agree as this has never been an exact science and we need strong opinion to be heard and debated for the good of the UK economy not stifled politically correct pandering to politicians and the press who generally do not understand or deliberately miss-interpret for a good story or political gain.3percent



Comments

Mark Alexander

11:49 AM, 12th March 2014
About 6 years ago

Great article Neil

Never thought you'd hear me say that of one of yours did you? LOL 😉

I think this is an opportune time for me to remind our readers to "stress test" their own properties.

We have made this very simple with our landlords calculator - see >>> http://www.property118.com/calculating-rental-yields-and-returns/ which shows what interest rates properties will break even at after factoring in all other costs. It also provides other useful numbers.

My advice to everybody who uses the calculator is to complete everything and download the full report to keep on file as a useful reference document. The download is also free and provides several cost busting, money saving tips to improve viability.
.

Neil Patterson

12:03 PM, 12th March 2014
About 6 years ago

Reply to the comment left by "Mark Alexander" at "12/03/2014 - 11:49":

Thanks Mark and good point about the Landlords Calculator.

Action and information generally cures fear.

12:39 PM, 12th March 2014
About 6 years ago

Last week, we celebrated the 5th anniversary of the 0.5% BOE interest rate with an interview and commentary from Stuart Law of Assetz.

Funnily enough, Stuart predicted in that interview that "3% was the new normal". 🙂

Romain Garcin

13:10 PM, 12th March 2014
About 6 years ago

I chuckled when I read that.
It reminded me how in 1998 the "New Economy" was the new norm and the stock market supposed keep going up at a crazy rate forever...

Always take predictions of what the "new norm" is with a (big) pinch of salt.

Neil Patterson

13:21 PM, 12th March 2014
About 6 years ago

I think for the foreseeable future foreign economic headwinds are going to be a big factor and quite unpredictable.

The only reason why the Chinese banking system is not in trouble is because it is already state owned.

Hence rampant uncontrolled growth and borrowing are going to be unlikely long term 5-10 years.


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