Mark Carney, the Governor of the Bank of England, has given his strongest indication to date that UK base rates will begin to rise in the New Year. In a major policy speech at the Lincoln Cathedral he spoke of UK rates rising to around 2.5% over the next three years. While this is a significant increase from the current 0.5% it would still be half of the historic average. There are obviously many things to take into consideration with regards to an increase in UK base rates which will have a material impact on many areas of the economy.
In general an increase in base rates tends to follow a period of significant economic growth with concerns that the market may be “overheating”. While there is no doubt that the UK economy has been one of the better performing in the Western world in light of the 2008 recession it is not exactly powering forward. The fact that the Bank of England is considering an increase in base rates in the first quarter of 2016 would in theory indicate expectations of a period of prolonged economic growth?
The simple fact is that an increase in UK base rates will impact the cost of finance and indeed many people on variable-rate mortgages could see a significant increase in their monthly payments. This would obviously reduce demand for UK property going forward although, as we have seen time and time again, the UK property market tends to adapt to its immediate environment. That said, it would be difficult to see a period of significant economic growth in light of increased base rates/cost of finance.
Are we on the verge of a return to the norm?
When you consider that UK base rates have been 0.5% for the last six years, in light of the financial collapse in 2008, an increase to around 2.5% would be significant by any yardstick. However, when you bear in mind that this is around half of the historic rate of UK base rates this puts the whole situation into perspective.
Even though it is difficult to look too far ahead with regards to the UK economy, and indeed the worldwide economy, we will slowly see a return to more traditional levels of economic growth and base rates. How long this will take is anybody’s guess because nobody expected base rates around the world to remain so low for so long even though we have gone through something of a traumatic period in relation to the worldwide economy. Could it take a decade to return to more traditional economic and financial levels?
Time and time again there have been rumours of an increase in UK base rates although this does seem to be the strongest indication to date. Hopefully the Bank of England has learned the lessons of years gone by when indications of a forthcoming increase in base rates caused confusion and mayhem in the financial markets. Surely this time we should expect the Bank of England to be true to its word?