The Bank of England has left interest rates unchanged at their record low of 0.5% at their latest Monetary Policy Committee meeting for November.
This is now the 44th month that interest rates have been at 0.5%, reflecting the seriousness of the economic crisis and the need to stimulate consumer spending by keeping down the cost of borrowing.
The Independent Centre for Economics and Business Research has said this week that they do not expect to see any rise in interest rates until 2016.
A forecast suggesting interest rates at 0.5% for a period of seven years would have been unthinkable only a few years ago. Today it sounds plausible.
But could interest rates fall to 0.25% or even zero in the near term?
Better than expected economic growth figures for the third quarter have reduced the likelihood of this to some extent. With the UK economy out of recession, the case for even lower interest rates has diminished.
That is not to say that the UK economy is out of the danger zone yet.
The biggest threat appears to come from the eurozone, with their sovereign debt crisis capable of derailing economic growth in the UK.
For this reason, lower interest rates at home could help secure UK economic growth. Less money being spent on servicing personal debt and mortgage borrowing could instead be spent on the High Street.
We should not underestimate the economic value of the ‘feel good factor’ that comes with higher consumer spending, as well as from rising property values due to lower borrowing costs. Putting more money into Funding for Lending, rather than spending it on QE, could also help here.
With National Savings & Investments cutting the interest rates on their tax-free cash Direct ISA from 2.5% to 2.25% this week, the expectation in the market appears to be for low interest rates or possibly a rate cut.
Individuals should plan for this interest rate outlook, considering how they might get the best returns on their cash savings and ensure their borrowing costs reflect a lower interest rate environment.
Photo credit: Flickr/myrrh.ahn
