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Question Of The Week: Will the Bank Of Engl. base rate be affected by the recession?
Former_MSE_Penelope
Posts: 536 Forumite
Q. Now we're officially out of the recession, what impact will it have on the Bank of England base rate and how quickly is this likely to happen? I've read other websites on this but they're just full of jargon. Jane, Coventry
Martin's A: I don't know the answer, and anyone who tells you they know what'll happen is lying. However let me lay out some simple principles. Increasing interest rates means people are more likely to save and less likely to borrow - therefore it's done to stop people spending. You generally do this if you're worried about inflation (prices rising quickly) and an overheating economy.
Our economy is only growing at a paltry 0.1% so that by itself is unlikely to mean rates will rise yet; however inflation's jumped up and the Bank of England's tasked with controlling it – which increases the likelihood of rates increasing at some point. Yet it's still very early days – at a GUESS I'd say no rate rises in the next few months at least, but you never know.
Click reply to discuss
Martin's A: I don't know the answer, and anyone who tells you they know what'll happen is lying. However let me lay out some simple principles. Increasing interest rates means people are more likely to save and less likely to borrow - therefore it's done to stop people spending. You generally do this if you're worried about inflation (prices rising quickly) and an overheating economy.
Our economy is only growing at a paltry 0.1% so that by itself is unlikely to mean rates will rise yet; however inflation's jumped up and the Bank of England's tasked with controlling it – which increases the likelihood of rates increasing at some point. Yet it's still very early days – at a GUESS I'd say no rate rises in the next few months at least, but you never know.
Click reply to discuss
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Comments
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Its important to bear in mind that the BoE is tasked with controlling inflation 2 years out, not current inflation0
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Are there any vacancies on the Monetary Policy Committee ? Perhaps Martin can put his name forward for consideration ? Will this committee be left in place if there is a new government ?
J_B.0 -
I would be surprised if rates rise before the third quarter, though I think the economy will surprise to the upside as we move through the year, opening the door to raise rates later in the year.Hope for the best.....Plan for the worst!
"Never in the history of the world has there been a situation so bad that the government can't make it worse." Unknown0 -
I think rates determine the pricing of alot of government debt present and future which is running higher then ever. They'll not raise rates any faster then the market forces them to, so more important then rates is the economic voodoo that is QE.
Are they finally going to shut that abomination down because this is what helps them keep rates lower then the real cost of debt financing this countrys public spending.
Take away that fiscal crutch and surely soon after a honest return will have to be paid regardless of whether we are ready or not0 -
Firstly with regard to Inflation in my humble opinion due to quantative easing (printing Money) which stands at 200 Billion as of the end of January 2010. This action WILL devalue the pound in the pocket! I personally feel that inflation will continue to rise. Traditionally the Bank of England has increased interest rates to curb spending and reduce inflation - this will not happen just yet. I expect the base rate of 0.5% to remain until the General Election in May 2010. Afterwards I feel that we will get increases of 0.25% per Month and finish 2010 on around 3%.0
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QE will not cause inflation as long as velocity of money supply continues to collapse. The risk is still deflation not inflation. I suspect inflation will peak in a couple of months at 3-3.5%, and then drop down to 1-2% in a years time.0
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There is a danger that inflation will arrive but the BofE will be unable to raise interest rates. That would be bad news for savers.
Mind you I'm not saying it will happen - my crystral ball has temporarily misted up.0
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