Cutting interest rates would be “extremely foolish”: Carney issues stark warning

The Bank of England Governor has warned against slashing interest rates as a remedy to putting a stop to record low inflation

As the UK experiences some of the lowest inflation rates on record – at just 0.3 per cent for January – Bank of England Governor Mark Carney has spoken out against proposals to cut interest rates.

He claims that slashing interest rates would be “extremely foolish” if the main purpose was to curtail the record low inflation and discussed how economists should not issue a knee-jerk reaction to the sharp decline in oil prices which he claims has generated the low interest rates in the first place.

Carney said that he actually expects inflation to fall further over the course of the year and predicted that it may even hover around the zero mark for the majority of the year.

He was keen to highlight that this was not something to fear though and urged the Bank not to cut interest rates.

“The thing that would be extremely foolish would be to try to lean against this oil price fall today [and] try to provide extra stimulus to get inflation up at this point in time,” he told the House of Lords economic affairs committee.

“The impact of that extra stimulus …would happen well after the oil price fall had moved through the economy and we would just add unnecessary volatility to inflation. That would be foolish.”

This is not to suggest that the Bank won’t be monitoring the situation closely though and Carney was quick to point out that they would remain “vigilant” of the situation so as not to disrupt the country’s economic recovery.

If Carney’s advice is followed and interest rates are maintained at levels similar to those already recorded then it could be advantageous for investors, landlords and the British public overall.

A low interest rate provides a positive backdrop for buy to let investors who are looking to expand their property portfolios as loan to value ratios will be lower.

As a result, deals are more affordable and lower levels of finance may be required in the initial stages of agreeing new mortgage deals.

This could help to support the property market both for homeowners and landlords by providing more lucrative opportunities and contributing towards the buoyancy and strength of the buy to let sector in particular.

For more views and analysis on interest rates please see a recent article from our Finance Director Simon Whittaker. Or for more data please see our Money Markets page.

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