Waiting for wage inflation
Despite stubbornly high price inflation, the Bank of England has continued to argue that this will not force an interest rate rise unless it is carried through into widespread wage increases.
This appears to be a key factor in the prediction of future interest rate rises.
Commenting on the subject yesterday, M&G head of retail fixed interest Jim Leaviss commented that interest rates rises are unlikely in the short term.
He believes that interest rates are unlikely to rise unless we start to see wage inflation.
Also commenting on the subject yesterday was Ian Spreadbury, a fund manager at Fidelity Investments.
Spreadbury commented that interest rate rises now would make things “intolerable” for many households.
He expects to see a few small interest rates rises but would be surprised if the Bank Rate was any higher than 1.5% at this time next year.
Interest rates are such an important financial planning topic currently because of the impact they tend to have on disposable income, for many households.
It is important to recognise that not everyone has benefited from historically low interest rates. Only those households with mortgages linked to the Bank Rate have stood to benefit from more money in their pockets each month.
Interest rates at 0.5% for two years have also had a big impact on the income available to households with savings.
Many older people rely on the interest on their savings to supplement their pension and investment income. With interest rates so low, for some households this has resulted in having to erode capital to maintain the same level of income.
Price inflation also remains a concern for those with cash savings, with this also eroding the purchasing power of savings each year.
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