The publication of the latest GDP figures last week suggested that the UK economy was recovering at a healthier than expected rate. This resulted in suggestions that interest rates might need to go up sooner than previously thought, to prevent the economy overheating.
The well respected Ernst & Young Item Club has entered the debate with a prediction that the Bank Rate will need to remain at 0.5% until at least 2014.
This prediction follows one from the newly formed Office for Budget Responsibility (OBR), who believe interest rates will need to start going up again next year.
The Item Club have based their prediction on the scale of planned government cuts which are likely to hold back economic growth over the medium term.
At the same time, they say that inflation will remain above the government target of 2% for CPI for the next 18 months, with high energy prices and the VAT increase supporting this.
So, assuming that the 0.5% Bank Rate remains in place for another three years or more, what does this mean for your Financial Planning?
It suggests that the return from cash, particularly in real terms after inflation, is going to be dismal. Some good deals can be had from fixed term cash deposits, but savers are going to need to erode their capital or take greater investment risk to deliver the income levels they were used to only a couple of years ago.
Low interest rates will mean lower expenditure on debts, including mortgage repayments. The next few years will be a great time to reduce outstanding loans.
Another consequence of low interest rates is that the return from other investment asset classes is likely to be more modest. This could result in investors adopting a more global approach to investing their money, as other economies recover at a more exciting pace and create opportunities for greater returns.
