Interest Rates Are The Lowest We Have Seen For The Longest We Have Seen But How Long Can It Last?
In the last meeting of the Bank of England monetary committee interest rates were held at a historical low of 0.25%. In the current environment the obvious questions is ‘are interest rates going to stay this low for much longer and when will interest rates increase?
Why Are Interest Rates So Low?
Interest rates have been at the historically low levels which we are currently experiencing ever since the credit crunch of 2007 when a series of bad decisions and greed led to one of the biggest financial crises that we have ever seen
Since then, the UK Government has used a combination of historically low interest rates and quantitative easing to try and kick start the UK economy. The result has been one of the longest periods of low interest in the UK’s history.
But how long can it last?
People have very short memories; they have a goldfish bowl mentality and it is incredibly easy to forget that the current situation just isn’t normal and that it was not that long ago that interest rates were at an eye-watering 17%
Reasons That Interest Rates Could Increase In The Near Future
This is the main reason why interest rates could rise in the near future. Pretty much the only tool at the disposal of the Bank of England to curb inflation is interest rate increases. Too much inflation and eventually interest rates will have to increase.
So What Could Cause Inflation To Increase?
Increases to food and shopping
The cost of food has been decreasing due in part to a major price war between supermarkets, with prices consistently falling over the last 4 years whilst prices generally in shops falling over the last 36 months according to the British Retail Consortium.
But can these price decreases continue? A report from Begbies Traynor showed that over 1600 food suppliers are in financial distress as a result of the continuing price wars and surely the cost cutting must end soon?
Price increases to oil and commodities
The World Bank expects a rise in crude oil prices for 2017 and forecasts a 25% increase in overall energy prices next year and a recovery in commodity prices as demand strengthens and supplies tighten.
The Fall In Value Of Sterling
The pound is now weaker than it was since the financial crisis in no small part due to the ramifications of Brexit. A weak pound can result in inflation. According to EconomicsHelp, as a rough rule of thumb, a 10% devaluation may increase prices by 2-3% with air travel, vegetables, gas, fuel and books being the goods affected the most.
Demand Pull Inflation
As well as the above factors pushing inflation higher there is also what is known as Demand Pull Inflation; a phenomenon in which consumer demand pulls inflation upwards.
Demand Pull Inflation can be caused by many factors but one of the most prevalent is an increase in demand caused by monetary stimulus, both internally, such as consumers having more money in their pocket and externally caused by fast growth and demand in other countries.
What Will Be The Effect Of Higher Interest Rates?
The most obvious effect of higher future interest rates will be on mortgage interest payments. As any mortgage adviser can tell you, mortgage interest rates are at absolute rock bottom and are lower then have been seen for decades.
Over the last 5 years, a great deal of the UK house price increases hs been down to the very low cost of borrowing and many financial commentators believe that interest rate increases could result in a house price crash.
It may not happen and perhaps rate increases will only come very slowly but equally there is the chance that very soon the ultra low-interest rates taht we are experiencing may soon be a thing of the past as interest rate normality returns.