UK interest rates may not rise for years, says BoE governor

UK interest rates may not rise for years, says BoE governor

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UK interest rates may not rise for years, says BoE governor

The Bank of England interest rate may hover around 0.5% for at least another two years because of a weak economy and overwhelming personal debt.

Bank governor Mervyn King has hit out at interest rise hawks speculating that rates must soon go up in a speech to a finance committee at the European Parliament.

His view is too much borrowed money is sloshing around in the economy and raising interest rates would push too many people and businesses in to bankruptcy – and he sees the problem persisting for some years.

“The economic consequences of high-level indebtedness now would become more severe if rates were to rise,” said King.

“It is the main reason why interest rates are so low.”

“The sheer volume of debt in the economy is still very large and this poses massive macro-economic challenges that will last many years.”

Former Treasury adviser Roger Bootle backs Mr. King on a state of the nation report for auditor Deloitte and Touche.

“The underlying momentum of the economic recovery looks pretty weak. My central forecast is still that rates remain on hold throughout this year and next,” he said.

Mr. Bootle also predicts the Bank of England may consider more quantitative easing to bolster the economy.

His report suggests inflation will remain between 4% – 5% for the rest of the year before dropping back to the Bank of England target of 2% sometime in 2012.

The Bank of England monetary policy committee, chaired by Mr. King, meets again on Thursday to set interest rates for May.  The rate is expected to remain unchanged, according to forecasts from 43 economists and city analysts polled by financial news provider Bloomberg.

Committee members are not unanimous in their support of Mr. King, with Andrew Sentance having argued for some months that interest rates should rise to tackle inflation.

Comments

7 years ago

One word....Phew!

(and who is this Andrew Sentance and where does he live?!)

Ellis Daniels

7 years ago

That is so good to hear! Long live Mr King, Mervyn King for PM, etc...!

7 years ago

Hey Avi 🙂
I think we should have that t-shirt printed 🙂 x

Mark Alexander

7 years ago

Long live the King!!!

Well let's hope so. This certainly puts a different perspective on why rates are where they are. A handle on inflation may not be the most important determinant.

As I understand it Sentance left some time ago?

Rich

7 years ago

Inflation is not all casued by internal consumption; most of it is caused by external factors such as as the phenomenal growth in China and India who are both suffering high bouts of inflation. And they're trying their best to control inflation by raising base rates - India is suffering 8.9% and china only 5%.

However, the Chinese are so worried about it, that they've reduced their growth to under 10% in April but the Indians seem unable to control their inflation which is raising global inflation. Mervyn King is doing the right thing because the UK, or even Europe as a whole cannot directly control external consumption.

This means that, if they raise rates, inflation wouldn't be affected very much and the economy would lose 2 ways: reduced economic activity and stubbornly high inflation. Some people are calling for more quantitative easing. This is madness as it's like borrowing more money which invalidates the austerity measures the Government put in.

The "steady as she goes" attitude of the BOE is the correct one. Notice how inflation in March fell to 4% from 4.4% in February. This may be explained by the fact that retail sales unexpectedly rose in March. This can only be explained by the fact that desparate retailers reduced their prices to encourage sales. This seems to have done the trick: increased sales and lower inflation without the need to increase interest rates.

Oil in New York fell to below $100 a barrel recently and gold and silver fell off their peak. This points the way to lower inflation globally especially if the Asian Tigres reduce their growth and hence consumption. One commentator in the article claimed that UK inflation would fall to 2% sometime in 2012 without telling us how. I'll tell you how: reduced global growth particularly in the East: the West is already struggling to keep up with a 2% target inflation.

By the way, UK year-on-year retail growth to April is higher but GDP is lackluster. This is no time for increased base rates because it didn't contribute to inflation.

Thanks for that Kasim, an interesting contribution. I just checked, oil and PMs have dropped, as has copper, but it's only in the last few days so may not mean much. Up till then it's been a long steady climb.

I agree that commodity prices are the main driver for inflation and that factors external to the UK economy are driving those. Wages inflation isn't really a factor and with the economy so weak isn't likely to be so for a while. So keeping IRs where they are seems the sensible policy.

7 years ago

It seems that we're all in agreement that the King is doing the right thing under the circumstances. I take Richard's point about the reduction in commodity prices is recent and it's early days to celebrate. It could be the pull back before they continue their upward move.

However, prices can only go so high before they become unaffordable and will reduce demand hence reduce prices. The Asian tigers could be building a bubble in their economy and an inflationary one at that. This may deter them from further growth, at least while they have uncontrollable inflation.

India and China are busy raising interest rates and the latter is allowing the yuan to rise in value at a greater rate than prviously. The Americans complained that the yuan's trade-weighted value should be much higher than it is now.

I'm hopeful that these factors will reduce global inflation.

Hi Kasim, I'm aware the Chinese have been doing their level best to keep the Yuan artificially weak to help their export market, and others, notably the Americans, have been complaining. Talk of bubbles in the far East is interesting. Property in China has massively inflated in value, particularly in Beijing, Shanghai and Shenjan. It will be interesting to see how it plays out, they have never had a property boom before as there has never been enough property in private ownership to cause one. If there is a bubble, it may not burst, just stop inflating. Most units are bought for cash as a safe place to park surplus funds, so there aren’t loans to be serviced so no danger of repo. There are other odd things too compared to the UK property market, for instance rental yields are extremely low, maybe 2%. Last time I looked you could only buy a 70 year lease. This may have changed but likely most of the apartments would have fallen to bits by then anyway, according to my brother who owns several!

maggie hurst

7 years ago

well I know precious little about economics but the remark that increased retail spending can only be explained by desperate retailers lowering prices seems to ignore the kind meteorological climate! Nothing a spell of good weather to urge people to go out and spend a bit...change their wardrobes, garden furniture and all the rest......

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