The Bank of England’s chief economist Andy Haldane has said there is no rush to raise interest rates, as he believes the economy hasn’t fully recovered from the financial crisis.
He feels that with inflation being extremely low and global risks such as Greece and China rates are best left on hold. Although it has to be said that he is the most positive on rates amongst The Bank of England’s rate setting committee. Many of them believe that in the absence of the Greek debt crisis it is possible that we may already have experienced a rate rise.
Over in America their economy has continued to improve but interest rates have remained on hold, and like our economy, have not changed since 2008. However the Federal Reserve Chair Janet Yellen has strongly indicated that rates will rise this year, but she has added that this is providing the economy continues to improve and unemployment carries on falling.
The US rate setters are meeting again to discuss rises during September and December, with some commentators thinking that if they don’t raise them sooner, in September, then rates will remain unchanged until 2016. I believe it is important to watch America as they are further ahead with their recovery than we are, and I believe that unless something unusual happens that the US will be the first to raise rates.
So if we accept that unless something unforeseen happens both the economies I have focused on will increase rates within the next year how will this affect the British consumer?
I would imagine that the battered saver will be celebrating, but homeowners after many years of unchanged rates will be less happy. Homeowners have amassed over one trillion of debt and some are fearful of rate raises. Many have got almost one third of the way through their 25 year mortgages and not seen rate rises. This has never happened before with most of us being used to rate changes every few months before the financial crisis. It is hoped that borrowers are not living with a false sense of security, and are preparing for base rate rises that many are predicting in the medium term could add 2% to mortgages. For who many feel that they may struggle with these rises or want certainty buying a long term fixed rate could be the answer, with 5 year rates competitive at around 2.5%.
For savers the opposite could apply with it perhaps not being such a good idea to buy long term fixed rate bonds unless you want a certain return. It is probably better to concentrate on the two year market or variable rates. Also although inflation is low if rates rise we could start seeing increased inflation. So for savers it could be worth considering inflation linked bonds but it is recommended that advice is taken on all the above before making a commitment.