Interest rate rise on the cards ìcould present a huge risk to our economyî (BCC director general John Longworth)



Interest rate rise on the cards ìcould present a huge risk to our economyî (BCC director general John Longworth)

Mark Carney, talking to Birmingham Post, had claimed that inflation likely to drop below 1% over the next few months, not rising again until late 2015. ìÖfor this economy to have balance and inflation to get back to 2% [the Bank of Englandís target] over the next few yearsÖin all likelihoodÖinterest rates are going to have to increaseî. Mr Carney emphasised the probability of a gradual hike in interest rates, while expressing uncertainty about the exact time frame.

BCC (British Chamber of Commerce), in a revised forecast, predicted an interest rate rise towards the end of 2015 (to 0.75%), with rates reaching but unlikely to exceed 1.75% by the end of 2016. This marks a 0.25% increase on the current rates of 0.50%, an historic low that has remained the same for the last five years.

BCC director general John Longworth has said that Britainís ìdependence on consumer spending and mortgagesî makes our economy ìparticularly sensitive to interest ratesî.  Adding: ìany short-term rises could present a huge risk to our economyî. David Kern, also of BCC, stressed the importance of keeping interest rates low in order to ìminimise the risk of the recovery stallingî.

They (BCC) expect British economy to grow by 3% this year, 0.2% less than their previous forecast suggested (though, as stated on the BCC website, ìthis figure still represents the fastest growthÖsince 2007î). Predictions for 2015 and 2016 were also downgraded (by .2 and .1 %, to 2.6% and 2.4% respectively). These lowered predictions are down to slow growth in household consumption, exports and services. The idea is that a short term increase in interest rates will exacerbate this slow growth, potentially spelling disaster for the economy.

But Bank of England policy maker Ian Mcafferty is not convinced, arguing that ìa small rise in Bank Rateî now is actually exactly what we need to ìsupport and sustainî Britainís economic recovery, ensuring that increases in the future remains ìgradual and limitedî.

Indeed in their most recently quarterly statement, the Bank of England have claimed that gradual increases in interest rates will not actually have ìunusually large effects on household spendingî.

So long as wages increase appropriately with interest rates and inflation, few individuals and families will actually be adversely affected. However, historic trends make this something of a tall order: inflation has been outpacing wage growth pretty consistently for the last six years at least.

Ian Mcafferty claimed that the right kind of rises in interest rates could also ensure a steady increase in wage growth, which he admitted was ìstill benignî; though this is itself is partly down to the increase in number of lower-paid jobs on the market which has an adverse effect on average national wages, so the situation might not be as stagnant as the figures make it look.

Indeed these figures are, to some extent, predictable; as consumers tighten their purse strings in the midst of economic recovery, they become more budget conscious, shopping online rather than on the high street and staying in low-cost over luxury hotels for example. This leads to more and more lower-paid positions opening up to cater for the demand for cut-price services.  

What we have seen though, in the last few months, is a small but tangible increase in wage growth that follows predicted trends: as recovery generally becomes more and more entrenched, workers become more comfortable attempting to move up their various corporate ladders, acting from a position of relative stability rather than as a knee-jerk reaction to economic strife.

While Mcafferty remains optimistic, and likely correct, about the positive impact on the economy that may follow a gradual increase in interest rates, it is still hard to ignore that statistics that show the adverse effect it may have on many individuals and families, despite the broad claims above.

A 10% increase in household income before a 2% interest rate rise would mean a 50% increase in the number of individuals in financial distress. This, coupled with the low expectations for growth of earnings in lower-paid or low-skilled employment means an understandable degree of pessimism among those who are financially most vulnerable.