The interest rate rise illusion

Post by Mearns & Company in News

The latest Quarterly Inflation Report suggests there will no base rate rise this year.

“Free beer tomorrow” – a sign that used to be spotted in some pubs before they were closed down or evolved into restaurants. Of course, tomorrow was always a day away, so the free beer was only ever an illusion. It is starting to feel the same with increases to the Bank of England’s base rate.

“Interest rate rises next year” has become a variant on “free beer tomorrow”, with learned predictions from experts, including the Bank of England’s Governor Mark Carney, proving to be mere educated guesses and, so far, incorrect ones at that. In presenting the Bank’s latest Quarterly Inflation Report, Mr Carney said that the Bank “… has long expected that these [economic] headwinds will likely merit not only a more gradual rate of increase in Bank Rate than in previous cycles, but also require levels of Bank Rate to remain below average historical levels for some time to come”.
Sign reading 'free beer tomorrow'

Looking at the Report itself, there is a graph showing how the money market (not the Bank) expects official interest rates to move over the next three years. At the same time, the Bank of England did not confirm if the market’s figures were built into the Bank’s economic forecasts. As of May 2015 the market reading was that the “…Bank Rate is expected to rise from early 2016, but to only 1.4% in three years’ time”.

That is a much slower pace of increase than in previous interest rate raising cycles, but it ties in with the Governor’s remarks. However, it could also be wrong: as Mr Carney remarked after the general election, “Last week, we were reminded of the difficulties in forecasting the outcomes of complex, interacting systems”.

Fortunately there are plenty of ways of generating income that do not rely on base rates, some of which have seen an increase in yields in recent weeks. If you are interested in generating income from your assets, please contact us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

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