Could the slowdown in GDP growth lead to the postponement of the interest rate rise?

By Anita Jaynes on 13 November, 2015

Go ahead, you can sigh. Whether that is a sigh of relief or exasperation, we are all in the same boat.

After months of telling buyers and owners to prepare for the “inevitable” rate rise at the turn of the New Year, the UK and global economy has continued to slow down, resulting in many economists doing complete U-turns in their thoughts, with most now predicting an increase in Q4 of next year.

Jeremy Morcumb from Mortgage Advice Bureau explains why.

Why is it so hard for there to be an exact prediction?

The interest rate rise is ultimately decided by the Bank of England’s Monetary Policy Committee (MPC), which consists of nine members, including the Governor, Mark Carney.

The MPC’s main aim is to set a Bank Rate that will enable their pre-determined inflation target (2%) to be met. Each member of the MPC has extensive knowledge and experience in economics, which is often where the problem lies.

Currently, the members are divided over when the right time to start the interest rate rise is, and it is for this reason that an exact timescale cannot be predicted.

Why the sudden change in predictions?

Firstly, it should be noted that, whilst some are predicting a later increase in interest rates, there are still many that say the latest the rise will take place is in February 2016.

With oil prices continuing to fall, China’s ‘Black Monday’ stock market crash, the US Federal Reserve’s decision to keep its own base rate at 0.25%, and inflation in the UK returning to negative figures, many believe that hiking the UK Bank Rate could hinder the ongoing recovery.
The UK also recently experienced a surprise slump in manufacturing and it biggest drop in construction output since 2012, leading to a slowdown in economic growth that was greater than predicted.

Add all of this to the fact that the latest figures from the Office for National Statistics (ONS) show inflation falling back to -0.1% after its brief respite at 0.1% (still way below the Bank’s target of 2%), and you can begin to see why a rise could be less likely to happen, in order to help encourage consumer spending, thus boosting inflation.

So, what’s next?

The slowdown in growth means that the MPC and policymakers will need to assess where the economy is at, which could postpone any likelihood of a rate rise for a little while longer.

The next MPC committee meeting takes place on 5th November, and whilst we are unlikely to be given any clarity on their thoughts as they continue to debate among themselves, for now, we can only theorize on prospective dates.

Jeremy Morcumb from Mortgage Advice Bureau – for further information call: 01793 611400

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