Interest Rates may Fall Instead of Rise

interest rate cutAfter years languishing at record lows, it has recently been reported from numerous quarters that the Bank of England may finally raise interest rates in the near future. However, the Bank’s chief economist Andy Haldane has now suggested that the opposite may happen, and that rates may be cut even further depending on how the economy performs in the rest of this year.

There is a risk, he says, that inflation may not manage to pick up over the second half of this year. There is a further risk that the UK economy will be hit by fallout from difficulties in emerging economies. If this is indeed how the UK’s economy proceeds over the next few months, then Haldane believes that further cutting interest rates would be a viable strategy for protecting the UK from further difficulties.

This news has surprised many not just because the opposite, an increase in rates, has been so widely rumoured but because the longstanding current rate also represents a record low. At present, rates stand close to zero at just 0.5%, and have been there for the past six years.

Previously, it was forecast that inflation, which has also been low and even negative in recent months, would pick up through the later half of the year and this could herald an increase in interest rates. However, with output in both the construction and manufacturing sectors flagging according to recent surveys, and employment figures also weakening, the UK may not experience the levels of growth in this period that have been hoped for. As a result, many are forecasting this will not be the time that inflation rates begin to pick up after all.

“The balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside,” said Haldane. He also pointed to the difficulties that the economies of China and Greece have recently experienced, calling them “the latest leg of what might be called a three-part crisis trilogy.” As such, he believes that we are far from reaching a point where the case for an increase in rates has been compellingly made.

“Were the downside risks I have discussed to materialise,” he said, “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.”

However, not everyone is in agreement with Haldane’s views. In particular, Andrew Sentance, a former member of the Monetary Policy Committee, said that Haldane was “spouting rubbish.”

Speaking via Twitter, Sentance said: “Cutting interest rates from all-time low is unnecessary. Doing so when economy in 7th year of recovery totally foolish.”