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Interest Rate Forecast

The unanimous decision by the Bank of England’s Monetary Policy Committee (MPC) this month to maintain its 0.5% Base Rate marks its third consecutive year at this level.

The bank has used low rates and its quantitative easing (QE) programme to mitigate monetary policy in an attempt to both support and stimulate the fragile UK economy. Along with its decision to hold the Base Rate, the committee voted heavily in favour of continuing with its current QE programme. Minutes of the meeting saw two dovish members, David Miles and Adam Posen, voting to increase the size of the asset purchase programme by £25 billion. There are strong doubts amongst city economists whether this policy is enough to generate any recovery given the increased funding costs faced by UK lenders in funding markets during 2011. The eurozone crisis and sovereign debt worries have seen the cost of raising retail and wholesale deposits significantly increase. Such costs in turn have prompted a rise in mortgage rates for some borrowers despite the low level of Bank Rate.

It is difficult to comprehend when rates first fell to 0.5% the market expectation was they would rise imminently, with market opinion predicting rates to have reached 3% by now.

So What Do We Think?

The Bank of England’s Monetary Policy remains unanimous in keeping interest rates at their current level with some members voting to extend the QE programme. In our September forecast, we anticipated rates would begin to rise in 2013. In light of the ongoing eurozone crisis, and with some leading economists speculating the bank could cut its rate to 0.25%, it is now apparent it will be longer before we can expect the first increase in rates, possibly 2014.

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