Expect base rate increase at turn of the year
Howard Archer, chief UK and European economist at IHS Global Insight, said while there was some doubt as to whether a late-2014 or early-2015 date would be chosen by the central bank, borrowers should anticipate an increase in this period.
Archer said the upcoming August meeting of the Monetary Policy Committee would result in interest rates remaining at 0.5%.
“The minutes of the July MPC meeting leave it looking pretty balanced as to whether the first interest rate hike will come late this year or early in 2015,” he said. “While no MPC member voted for an interest rate hike in July, the minutes reveal a serious discussion over the case for an early interest rate hike.
“On balance, we currently just about favour an interest rate hike at the end of 2014, rather than in 2015, but it certainly is a very tight call. Indeed, we would not be dumbstruck if the Bank of England delayed acting until 2015.
“In reality, it probably makes little difference whether the Bank of England acts in late-2014 or early-2015. What is most important is the probability that interest rates will only rise very gradually regardless of when the first hike is.”
Archer said the Bank must make sure to increase rates slowly to avoid damaging market confidence.
“This is the key message that the Bank of England is looking to get across and for businesses and consumers to take on board. The Bank wants households and firms to structure their spending and investment decisions around the fact that while interest rates cannot stay down at 0.50% for a whole lot longer, but they will not rise nearly as quickly or as far as in past tightening cycles.”