At the time of writing, the UK’s Interest rate was approaching its seventh year at the historic low of 0.5%. As a tool for managing the economy interest rates are rather blunt. The UK in many respects has become the sum of many micro markets, particularly in terms of housing, where London and the South East continue to remain bullet proof to the volleys of global economic turbulence. A safe haven for international capital, London property remains the equivalent of a Swiss bank account for many foreign investors. The imbalance of supply and demand and higher income means interest rate rises can sometimes not even touch the sides in the capital and yet 3 hours further north they can cause real misery. But even our other cities, such as Manchester, are experiencing levels of good economic activity that do not translate far outside their own jurisdictions. The Chancellor’s plans for Devolution are built on encouraging northern powerhouses to succeed and export their wealth to their outer regions. Higher interest rates have no place in that right now.
But if the political will to raise rates is not there then the economic case has been no more compelling. No real wage growth, a prolonged period of deflationary energy prices, and yet increasing employment mean there is little case for reigning in what economic activity consumers are engaged in. Furthermore, the implementation of pension auto-enrolment has meant that for working people savings will have to happen and the stock markets and new investors will benefit while the cost of living remains flat.
Of course those with savings in cash deposits now need higher interest rates are feeling the lack of return but for many coming into the system, they have benefited hugely from having earned, saved and spent more than any of their forebears. Indeed if there is any real complaint it is simply that governments have been reluctant and remain so to admit it was all on borrowed money and that now is the time of their sacrifice. Inflation is not expected to reach its 2% target for some time yet so while many with cash deposits will acutely feel the seven year itch, for the borrowers a further prolonged period will be welcome.
But there are outliers. If the EU Referendum vote goes the way of a Brexit, we may yet see rates cut to cope with the impending economic maelstrom that would accompany such a decision. Europe’s wrath and London’s loss – not to mention Scotland’s renewed claim for independence (ignoring the calamitous price of Brent Crude for a minute) - would mean the ensuing volatility would demand some pre-emptive action.
There is no prize for rocking the interest rate boat right at this moment. Fiscal policy is dealing with housing issues such as Buy-to-Let very effectively, and initiatives such as Help to Buy, the Starter Home Scheme and Shared Ownership mortgages are attempting to address with a modicum of success the first-time buyer market.
Finally, of course, it is by no means certain that even if a rise does arrive in 2016 that it will not be cut soon after. My opinion is that we can expect no rate rise until 2017 and quite possibly beyond.