Also – what is the Bank of England base rate, and why should you care?
Remember the halcyon days of mid-2014?
It was all the economic rage to predict that the Bank of England’s base rate – which directly impacts savings, borrowing rates and mortgages (see explainer below) – would finally creep up from its historical low of 0.5%, where it’s been held for six years.
Ah, how times have changed.
When we learnt a couple of weeks ago that inflation had hit 0.5% in December – the joint lowest level since government records began – we knew the base rate wasn’t going to behave like everyone thought.
That wily old base rate – the Bank of England just never adjusts it when you think it will.
Accordingly, a cacophony of economic experts changed their forecasts after the deflation announcement, and said that we might now not see the base rate increase until as late as 2016.
Bank of England governor Mark Carney hinted at the time that base rates could stay low for longer than previously expected.
Now there’s been another suggestion that the base rate could stay at 0.5% for the foreseeable future…
A not-so-subtle hint
Andy Haldane is a member of the BoE’s Monetary Policy Committee, the nine-strong team that decides the BoE base rate (see explainer below). He is also the Bank’s chief economist and executive director of monetary analysis.
Talking to Owen Hughes of the Daily Post (Wales), he said: “We are in no rush to raise rates, the recovery is taking hold nicely, the last thing we want to do is knock the stuffing out of that.
“At the last meeting we [the Monetary Policy Committee] voted unanimously to hold rates where they are.”
He even suggested the rate could stay this low for years more.
“They [rates] are historically low and they won’t stay like that forever but when that rise comes it is going to be very gradual,” he said.
“It could be half a percent a year for several years.”
Good news for business
One of the driving forces behind holding the rate at 0.5% is to encourage businesses to invest in growth.
A low base rate means that it will be cheaper for businesses to borrow from commercial banks, thus encouraging them to invest (see explainer below).
Haldane said in the interview: “I think that is what businesses want to hear, we want to speak directly to businesses, those who are planning to borrow and invest.
“It is a message to them that they are reasonably safe to do so with the knowledge we are not about to start raising rates.”
He added: ““Borrowing costs are low currently, and many firms [in Wales] were telling us a story about wanting to ramp up investment plans.
“This is something we have seen recently, the recovery has been one led by business investment.”
Of course, when businesses are borrowing to invest in their growth, it should follow that the economy will expand too.
So what does the future hold?
Haldane said: “People might be fearful that we could go back to the sorts of levels we saw in the 80s or 90s which were four, five, six, seven percent rates.
“We are clear that even when we are through this adjustment and rates are starting to rise, we don’t really see rates getting back to those levels. Maybe the new normal for rates might be 2% or 3%, maybe 4%.
“We hope this is some reassurance for businesses when they are taking out that loan or overdraft or deciding whether to make that investment in machinery or property.
“We were here to ask directly if that message is getting through.”
EXPLAINER: What is the Bank of England base rate, and how does it impact businesses and the economy?
The Bank of England’s base rate (or interest rate) is the rate at which commercial banks borrow money from the Bank of England.
The BoE has held the base rate at a historic low of 0.5% for six years.
When the base rate is low, banks borrow more cheaply, so in theory they lend out money more cheaply too.
That means a low BoE base rate makes commercial bank loans cheaper – so mortgages are cheaper and loans to businesses and consumers are cheaper.
That encourages people and businesses to borrow more and invest in their businesses or spend on consumer products and on buying houses.
This stimulates the economy: businesses invest in new machinery and open new branches, take on more staff, and so on; consumers spend more in shops, giving businesses yet more cash to play with; more people buy homes, stimulating the property market. All this (in theory) leads to economic growth.
A low base rate also means that commercial banks will offer lower interest rates on savings accounts, so there is a double incentive to spend rather than save, as it makes more sense to spend while borrowing is cheap than to save when interest on savings is low. SH
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