Understanding The Ongoing Debates Around Interest Rates In the UK by Jessica Foreman

Monday, 11 September 2017
The Bank of England has opted to keep interest rates at a record low of 0.25 per cent, but its decision is not without controversy. In July 2017, the money policy committee, which votes on what to do with interest rates, was split 5-3 in favour of continuing the low rate. Not only that, but it has now been reported that Andy Haldane, Threadneedle Street’s chief economist, had seriously weighed up going against governor Mark Carney and voting for a rate increase in June.

So, what’s going on with interest rates in the UK? Why are they so low and why do some people think it’s time to raise them?

Why are interest rates so low in the UK?

The Bank of England base rate plummeted in reaction to the global economic crisis. This was part of a strategy, along with bank bailouts and ‘quantitative easing’, to combat the crash – with the aim of encouraging banks to keep lending to businesses and individuals and stave off an inflationary crisis.

The rate reduced six times between October 2008 and March 2009, dropping from five per cent to 0.5 per cent, where it stayed until last summer when it halved to 0.25 per cent.

With sluggish growth and low inflation since, supporters of the strategy have stood by the decision and say the low rate has helped the economy to stay stable.

Why do some people want the rate to rise?

Yet, increasingly, this last view is being challenged.

It’s feared that low interest rates send a signal that the economy is struggling – giving the UK an image problem at a time when it needs to build new bridges with overseas partners as it leaves the European Union.

It’s not just reputational damage that is feared by critics, either. Some say, as Monevator notes, that inflation has been caused by low interest rates which have driven up the price of assets such as bonds, shares and property. Many fear that waiting too long to raise rates will simply store up a big shock for the future.

There’s also the chance that low interest rates might actually be causing a problem in relation to debt, from poorly run businesses stumbling on with the support crutch of cheap finance to families stuck in a cycle of cheap borrowing.

It’s worth noting that super-low rates are not the norm. Between 1971 and 2017 the average interest rate was 7.71 per cent, with a record high of 17 per cent in 1979. The target is to work towards an eventual rate of two per cent.

What will happen next? 

The 5-3 vote is a sure sign that the Bank of England’s interest rate is now up for active discussion. A split of opinion suggests that we might well be nearer to seeing interest rates go up for the first time since the economic crash.

How near is, however, still unclear. Everyone from first-time buyers looking for cheaper mortgage deals to pensioners with poorly performing savings pots and ETF traders looking to make their next move on the markets will be hanging on the word of the Bank. Many experts in the City still don’t think there will be any movement until well into 2018, but it wouldn’t be a huge surprise if things changed before the year is out.

Jessica Foreman is a Durham University graduate specialising in business and lifestyle based writing. She has developed her skills on projects surrounding The British Broadcasting Company, and running a print and online based magazine whilst at university. She is currently looking towards starting her Masters in Mobile and Personal Communications as well as broadening her horizons through travelling.