Why UK interest rates are likely to stay low for the time being
June’s Conservative-Lib Dem budget was a radical shift towards hefty public spending cuts in an effort to reduce Britain’s budget deficit.
There are a number of reasons why interest rates in Britain are likely to stay low for a while. The unique combination of tax increases and spending cuts will lead to a halt in interest rates until the financial situation has changed. It is of course inevitable that everyone in this country is going to be paying for the government’s debts in one way or another.
The Bank of England, which controls the UK’s interest rates, is currently regulating the base rate at just 0.5 percent, which means the banks are offering little or no interest for savers. However, the biggest problem at the moment is the fact that borrowers are still charged high rates. The banks can continue to do this so long as the government still owes them enormous amounts of money, which it will do for considerable time yet.
Meanwhile, the MPC (Monetary Policy Committee) has announced that the prospect for Britain’s GDP growth to recover to pre-recession levels in the medium-term is becoming less likely. Chief economist at the IHS Global Insight organisation Howard Archer expects interest rates to start increasing by the second quarter of 2011, with a 1.75% by the end of next year. Other analysts suggest that the interest rate forecast could be good for the strength of the pound, which may benefit from an increase in inflation and unhindered growth against other currencies. Currency analyst and independent financial advicer Tom Hampton said that sterling could reach EUR1.22 by the middle of August and EUR1.27 at the end of this year.
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