Bank of England economist says next interest rate move may be down and not up

Less than 24 hours after the US Federal Reserve decided to keep interest rates on hold, one of the Bank of England’s (BoE) key decision makers said UK rates may have further to fall.

In a speech to the Portadown Chambers of Commerce in Northern Ireland, the BoE’s chief economist Andy Haldane said that the bank’s next move could be a cut to the already record low 0.5 per cent rather than the hike most commentators expect.

“The case for raising UK interest rates in the current economic environment is some way from being made. It is simply too soon to tell how potent contagion from emerging market economies to the world economy will be. 

“Against these negative external forces are weighing solid UK domestic demand forces. But while the UK’s recovery remains on track there are straws in the wind to suggest slowing growth into the second half of the year such as softening employment and surveys suggesting slowing output growth,” he said.

“In addition headline UK consumer price inflation is still close to zero. Were the downside risks to materialise there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target.”

Analysts said Haldane’s views were unlikely to be echoed by BoE governor Mark Carney, or the monetary policy committee which decides rates.

“While there is currently considerable uncertainty as to when the BoE is likely to start raising interest rates, Andy Haldane’s stance looks isolated within the monetary policy committee,” said Howard Archer, chief UK and European economist at IHS.

Haldane’s comments followed the decision by the US Federal Reserve to maintain its interest rate level despite many analysts expecting a hike because of the strong US economic recovery.

However Nick Dixon, investment director at Aegon UK, said he expected a rise to happen soon. “Global markets will breathe a sigh of relief however it merely delays the first upward move. The Fed looks increasingly likely to blink first in the transatlantic race for interest rate lift off and will move in the next few months, while no-flation in Britain delays the Bank of England’s first move until the first half of 2016,” he said

Ayan Mitra, CEO of crowdfunding platform CrowdBnk, believed a delay will be positive for small businesses looking for investment. 

“Investors in the UK will have been watching the Fed’s decision closely. With the US expected to lead the way when it comes to tightening monetary policy, the decision to hold fire means investors in the UK should not expect the Bank of England to start raising interest rates until 2016 at the earliest. For savers, this means paltry interest payments from deposit accounts are likely to remain with us for some time,” he said.

“Rather than stick with these derisory rates, investors have the option to target higher returns via a number of investment opportunities in newly-launched businesses. Mini-bonds are an increasingly popular way for investors to generate an income above that paid by banks.”

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