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

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

8:33 AM, 5th May 2011, About 10 years ago 14

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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

by

9:07 AM, 9th May 2011, About 10 years ago

If people were encouraged to come out and shop by the good weather alone, it would've increased inflation. But, because inflation actually decreased in March, it suggests that prices were decreased. Everything being equal, increased sales equals higher inflation as retailers up their prices due to increased demand. I believe that it's the lower prices that actually encouraged the increased sales. Hence greater sales at lower inflation.

With inflation at twice the target of 2%, it's not time to celebrate. There are many weaknesses in the economy which is what ties King's hands in relation to interest rates.

by

9:20 AM, 9th May 2011, About 10 years ago

Thanks for that Rich. I didn't know the Chinese bought their property for cash. This still means that a bubble can develop and, when it bursts, individuals and companies will still be out of pocket. Will the Chinese Central Bank then bail them out? If they don't, their economy will grind to a halt.

I don't think that the problem is caused by debt. It's caused by the lack of availability of hard cash. If you pay 100K dollars for something that's worth only 50K dollars and then sell it for 40K dollars, you've lost 60K of your hard earned cash. To me that's worse than being bankrupt because of debt.

This is because when banks lend money, they create debt which they get back with interest. If you default on it, it's only the artificial money that gets lost. But, because contracts are signed which depend on that artificial money, you'll still be asked to pay it. This is why I'm against printing money (QE) because it devalues the existing money in circulation thus increasing inflation.

by Richard Greenland Richard

23:08 PM, 9th May 2011, About 10 years ago

Hi Kasim, my sister-in-law (brother's wife) works in RE in Beijing and says the Chinese government are trying very hard to prevent a property bubble developing. I find it really interesting how this will play out because as I say, it's unprecedented. I'll try to get them to comment but not all websites are available from China. Yes Chinese people pay cash. They tend to pay cash for UK property too. The main reason for buying it is often to bank cash in a safe asset, a bit like buying gold (until a few days ago LOL!)

by

23:23 PM, 9th May 2011, About 10 years ago

Talking inflation-a friend who owns an Indian takeaway says the cost of LAMB has DOUBLED in the last 2 months.
Any ideas ?


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