Recent media speculation about a potential interest rate rise this year was quashed yesterday, as Bank of England governor announced that they would be keeping interest rates at their historic low of 0.5% for the foreseeable future.
Many leading economists in the UK had forecasted that recent growth data, unemployment rate falls and productivity rises would force the bank to reconsider their plan to raise interest rates in 2016, though Governor Mark Carney has remained hinged on his stance towards his forward guidance policy.
It is now thought that Mr Carney will make an announcement next month that lowers the unemployment threshold below the initial 7%, so that he can retain interest rate levels at their all-time low of 0.5%. An estimation of 6.5% has been given by many leading economists for the new threshold Mr Carney will unveil next month, though the credibility of this change has been thrust into question by a large portion of them.
Interest rates were intentionally increased to the current level back in 2009 in a bid to improve the spending capabilities of people across the UK, and were expected to remain the same for a three year period.
However, they have now held at the same level for almost half a decade, and Mr Carney has so far refused to consider any premature rises from his initial 2016 forecast publically.
Alan Clarke of Scotiabank said: ìWe think that 7 per cent will be hit in the early months of 2014. As a result, the Bank is likely to modify its forward guidance policy – lowering the threshold to 6.5 per cent – most likely at the February inflation report.î
A strong finish to the countryís economic performance during 2013 and a sharp decrease in unemployment have both been cited as the primary reasons for why economists believe interest rates should rise prematurely.
Despite a small decline at the end of the year, statistics have suggested that gross domestic product growth in the final quarter of the year held at 0.8% from the quarter before.
However, Brian Hilliard of organisation Societe Generale has identified that the Bank of England are still unconvinced that the countryís recovery has truly taken grip, and will likely not consider increasing them to at least the summer next year.
She also highlighted that the current trajectory of the pound has decreased the likelihood of an interest rate rise, because it may detract foreign investors purchasing British exports in the future.
Howard Archer, chief economist at IHS Global Insight, said: ìAny near-term rising of interest rates could cause sterling to strengthen even more with damaging repercussions for export prospects.
ìSterling’s strength should help to contain consumer price inflation over the coming months and give inflation a good chance of staying close to its 2 per cent target level for an extended period after dipping to a four-year low of 2.1 per cent in November.
The likelihood is that interest rates will not rise to at least 2015, though it may be time to start questioning whether this is the best policy for the country.
Mr Carneyís hinged stance suggests that he is unwilling to renege on his initial designs for his forward guidance policy, despite the fact that economic statistics at the moment perhaps necessitate that it is at least worth considering.