Recently, the Bank of England’s monthly meeting of the Monetary Policy Committee (MPC) voted unanimously to keep interest rates at an all-time low of 0.5 percent, keeping the base rate at rock bottom for the seventh year in a row. The decision was taken in part to avoid major shocks to the economy during a period of widespread uncertainty, as the United Kingdom prepares to hold a referendum on whether or not to leave the European Union.
"There appears to be increased uncertainty surrounding the forthcoming referendum," policymakers said in a statement announcing the decision about interest rates. "That uncertainty is likely to have been a significant driver of the decline in sterling. It may also delay some spending decisions and depress growth of aggregate demand in the near term."
Steady or Further Down? The Future of Interest Rates
The development has also spurred a debate about what will happen to interest rates going forward. Speaking with the financial website This is Money, Economist Sam Alderson expressed doubt about whether interest rates would go up in the near future.
"Given the outlook for both output and inflation, it looks highly likely that we will see an eighth year of unchanged interest rates," he said.
"While we expect inflation to recover towards 1% later this year, the members of the MPC have plenty of time to watch the supporting factors, such as accelerating wage growth and commodity price increases, materialise," Alderson added. "In the meantime, policymakers can afford to keep monetary policy accommodative, helping to offset some of the downward pressure on the domestic economy."
Earlier in the year, widespread concern that interest rates might be cut below zero led to an outcry in the media against such a policy. "In the economies where negative interest rates are most deployed, the credit channel is particularly important, and this is impaired," said Catherine Mann, chief economist at the Organisation of Economic Co-operation and Development, a Paris-based think-tank. "Banks in Europe for example have not deleveraged, and as a result they are not in a position to effectively lend credit," she added.
What About Up?
The input of commentators like Mann may have had an effect on the MPC’s decision to hold interest rates, but inevitably, homebuyers are wondering when rates are likely to go back up. Many have expressed concern that low interest rates, as well as the country’s inflation rates, could lead to a recession. Higher interest rates can increase the value of a currency, but also give people incentives to save rather than spend.
Earlier this month, longtime investor Neil Woodford said that it was "laughable" to think that interest rates could go up anytime soon. He told the website What Investment that a recession was highly unlikely and that "deflation is the threat, not inflation."
So, for the immediate future, the prospects for interest rates in the United Kingdom remain unclear. However, most experts seem to agree that, if they do move, the direction won’t be up. Good news for homebuyers?
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