Citing weaker UK growth than expected and the current turmoil in the global economy, the Bank of England governor, Mark Carney, has said that tighter monetary policy is not yet necessary in the UK.
An assessment of the “unforgiving” global economic environment and collapsing oil prices has led Carney to rule out an imminent rise in interest rates.
Six months previously the governor was reported as saying that a rise in interest rates would come into “sharper relief” at the beginning of 2016.
While not explicit, this was taken by many as an indication that interest rates would start rising early this year. A move that would have been welcomed by savers who, since the 2008 crisis, have faced the lowest ever interest rates.
However, the latest decision by the Bank of England, to maintain Bank Rate at 0.5%, is welcome news for mortgages holders; 72% of whom will see their mortgage repayments increase once Bank Rate does rise, according to research from TSB. For now, though, rate rises seem a remote prospect, with some economists predicting no change until late 2016, or even early 2017.
Speaking at Queen Mary University of London, Mark Carney said:
"Last summer I said that a decision as to when to start raising Bank Rate would likely come into sharper relief around the turn of the year." "Well, the year has turned and, in my view, the decision proved straightforward - now is not the time to raise interest rates."
The governor went on to say that any future rise in rates would be small and gradual.
"It is clear to me that since last summer, progress has been insufficient to warrant a tightening of monetary policy,"
Mr Carney said.
"The world is weaker and UK growth has slowed.
"Due to the oil price collapse, inflation has fallen further and will likely remain low for longer.
"It has always been the case that, because the economy is subject to unforeseen disturbances, the precise path for Bank Rate rises cannot be pre-ordained."
Mr Carney explained that the Monetary Policy Committee (MPC) would not be driven by the "calendar" on when to raise rates, but on "economic prospects".
"We'll do the right thing at the right time,"
he said. When discussing the American Federal Reserve’s decision last year to increase interest rates for the first time since the financial crisis, Carney dismissed any supposed pressure on the Bank of England to do the same. Inflation is stronger in the US and the British economy is more exposed to the global slowdown in growth, explained Carney.
He also highlighted the fact that the Federal Reserve’s rate rise had simply increased US interest rate to the same level as the Bank of England’s.
Three factors were cited as the strongest indicators of a rise in rates.
Firstly, that UK economic growth exceeds the average trend. For example, 2015’s growth at an average quarterly rate of 0.5% was seen as disappointing.
Secondly, that wage growth increases and productivity improves. And thirdly, that core inflation nears the target rate of 2%.
"These three factors I have described are guides for monetary policy decisions, but there are no magic thresholds," Mr Carney added. "The journey doesn't have a set timetable; only an expected direction of travel”.
Borrowers may therefore have more time to prepare for a rise in rates, which is good news given the recent findings from TSB.
While nearly three quarters (72%) of homeowners may be affected once rates rise, one in five (20%) do not understand how this will impact their monthly mortgage repayments.
The research also found that more than half of homeowners (56%) say they are already struggling with household bills.
Were rates to increase, 43% of borrowers would try to switch to a cheaper loan or mortgage, 33% would prioritise debt repayments and 14% would seek help from debt advice organisations, the survey found.
Ian Ramsden, director of mortgages at TSB, said:
“The statistics included in TSB’s report are fairly shocking and clearly there’s a lot of work to be done to help Britain’s homeowners understand how they can accommodate a rate rise. But there is no need to panic; a little bit of planning now can make a big difference in the future.
“We don’t know when the Bank of England will change the base rate, but we do know preparing early and helping homeowners understand their options is the first step in helping Britain get #ReadyForRateRise.”
20th January 2016