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UK Economy

The UK Economy and Interest Rates

Despite overwhelming hearsay about a cut in interest rates, in July, the Bank of England decided to keep them at 0.5%, where they have been since March 2009. This is a record in the UK for the most consistent rate of interest over any period.

DID THE BANK OF ENGLAND FUEL THE RUMOUR TO HELP THE EXCHANGE RATE?

BOE

The bank of england had stated on several occasions during statements made to the press, that they were going to loosen the grip on monetary policy and everyone took this to mean a cut in interest rates.

As a result, a cut was probably already priced in to exchange rates and when the cut didn’t materialise, exchange rates (GBP/USD and GBP/EUR) strengthened.

However the news from the BOE is still about “Loosening” All the newspapers and commentators will tell you that a rate cut will almost certainly happen in August.

Why will a cut in interest rates help?

Thanks to Brexit, the current british economy is an unknown quantity. Major business will not make any huge investment in the UK until they know what is happening and the same can be said for households.

As we know by now, if everyone stops spending and investing, our economy not only fails to grow, but there is a danger of a recession.

A cut in interest rates would encourage households and large corporations to spend their money rather than keep it in the bank, where it will not earn any interest at all.

A cut in rates would mean some mortgages will become cheaper. Anyone with a tracker mortgage tied to the bank base rate would save money.

What are the downsides to cutting interest rates?

A cut interest can fuel inflation. When the supply of money into an economy is increased, prices tend to increase, currencies weaken. Whilst this is good news for exporters, it means goods imported into the UK are more expensive and this leads to an increase in inflation.

inflation

A point to bear in mind is that currently inflation is very low and whilst the BOE is tasked with keeping inflation below 2% a rate cut would probably not make enough difference to worry about.

A rate cut does not benefit those that keep their money in a savings account. However interest rates have been so low for such a long period of time, consumers are used to not getting much interest on their money and have probably already done something about it. It may be that the banks do not pass on the cut to consumers for fear of losing customers money.

Pensioners about to purchase an annuity will probably be the worst hit. Annuity rates are largely tied to the yield on 15 year bonds and gilts, because that is what Insurance Company’s buy with the money.

Any rate cut would certainly cause 15 year yields to fall meaning that the currently poor rates being offered on annuities would be even worse.

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