We heard yesterday that the Bank of England voted unanimously to hold interest rates at their historic low of 0.5% at the most recent meeting of the Monetary Policy Committee.
All nine committee members voted in favour of holding interest rates, despite increasing calls for a rate rise from various pundits.
Even Bank governor Mark Carney has started describing low interest rates as a threat of the UK economy.
He claims that the combination of rising house prices and low interest rates could encourage households to take on unaffordable levels of debt.
Carney commented that, if the Bank left interest rates low for too long, they would risk a dangerous housing bubble and return to recession.
This is because families overextending with mortgage debt would be left with little to no disposable income once rates start to rise, knocking consumer spending on the head and causing the economy to contract once more.
He said: “History shows that the British people do everything they can to pay their mortgages. That means cutting back deeply on expenditures when the unexpected happens.
“If a lot of people are highly indebted, that could tip the economy into recession.”
The Bank of England is clearly having to balance the fine line between managing these risks of low interest rates and timing any rate rise carefully to avoid shutting off the economic recovery.
Rising interest rates pose greater risk to the economy than holding rates low, in our opinion, particularly as any housing bubble can be dealt with more effectively by managing retail bank lending.
Interest rates will rise; the big question remains when.
Carney has said that rates will not start to rise until real wages were rising consistently.
We are not there yet and might not be until well into next year, but preparing for the rate rise when it does come should be high on your list of Financial Planning priorities.
