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Interest rate heading up this year for first time since 2009

Mark CarneyInterest rates are expected to increase at the end of the year, the first rise in what will be almost seven years. Bank of England Governor Mark Carney has indicated that the long period of a record low rate of 0.5% is over.

Mr Carney’s comments reflect the relative strength of the UK economy and the anticipated return of inflation which fell again to 0% last month but is expected to rise as last year’s oil price slump falls out of the calculation. The Bank began targeting inflation in 1992.

An initial quarter percent point looks like the most likely option. This would be first move in the rate since it fell to its current rate in March 2009 and the first time it was raised since it rose to 5.75% in July 2007 – the month before the US subprime mortgage crisis erupted and signalled the beginning of the financial crisis.

Mr Carney, speaking at Lincoln Cathedral, forecasts a settling of rates at about 2% – about half their historic norm, he said. “In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”

The governor said the value of the pound might also be a factor. A strengthening of sterling would depress inflation by making imports cheaper and exports dearer. Referring to the Eurozone, he said: “This risk is particularly relevant at present when the monetary policy stance of our largest trading partner is diverging with ours.”

Calum Bennie, savings expert at Scottish Friendly, said: “Given inflation is currently at zero and the economy still looks a little fragile, it will be interesting to see if an interest rate rise actually transpires. Last year our favourite ‘unreliable boyfriend’ over-promised and under-delivered on interest rates, so this hint of an increase could be another case of smoke and mirrors.

“The possibility of an interest rate rise will generate a mixed reaction in people. Those who have borrowed money will see repayments increase and may begin to struggle to keep up, while on the flip side, savers are unlikely to see a rise in savings rates for some time.

“Those people who do think they might struggle if rates rise need to start preparing now to weather the changes. Putting aside a little extra each month will help act as a buffer so that any rise in the cost of borrowing can be mitigated.”



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